An IRS audit is never welcome, but there are steps which small and medium-sized businesses can take if served with an audit notice to make the process a bit easier and less stressful. Knowing how to respond is half the battle.
Key Point:The overall number of audits has gone up significantly! There is increased focus of the IRS on wealthier individuals, who often are owners of small and medium-sized businesses. These businesses tend to be organized as pass-through entities.
The IRS Focus
The IRS is increasing audits of wealthier individuals. Its coverage rate of households with over $1 million in income has increased from 5.57% in 2008 to 12.48% in 2011.
The primary areas of interest for business audits include transfer pricing, offshore accounts, passive activities, hobbies, executive compensation and employee status (such as independent contractor). Responding to studies on the tax gap, the IRS also remains particularly concerned with unreported and underreported income. Businesses with a high volume of cash transactions and no third-party reporting also are getting attention.
A Better Result from an IRS Exam
Keep in mind that IRS senior management has considerable interest in running the exam process efficiently.
1) Gather your financial team together as well as your documents. Upon receiving an IRS notice of an exam or review, bring together your key internal employees, gather relevant documents, and involve your Daszkal Bolton CPA and Account Manager. An untimely or unprepared response—especially at the first meeting—can leave a negative impression and affect the tone of the entire audit.
2) Show courtesy and respect. IRS agents have a tough job. Treating IRS employees with professional courtesy will make the IRS more likely to respond in kind. Also, they will be more likely to listen with open ears to better understand your position on the matter.
3) First things first – establish the scope of the examination. The IRS has embraced the concept of using an opening dialogue to discuss the framework for the audit. This is good news and can go far in preventing surprises or unwanted detours during the exam. Daszkal Bolton suggests business owners embrace this opportunity.
4) Meet deadlines in a timely fashion. The IRS will want to establish deadlines for production of information and material. The desire for the exam to be history should not cause the setting of unrealistic deadlines. Missing a deadline can have significant ramifications on a timely completion of an audit. The IRS examiner may have to reschedule your review for a day further down the road. Given the current environment of budget cuts and bigger workloads, the IRS will be working hard to get the job done on a tight schedule.
5) Be prepared. Organize and label documents. You and your personnel should be knowledgeable of all relevant facts and well prepared. Dumping irrelevant documents on the agent or stonewalling the agent with people who can’t provide the necessary information is not in your best interest.
6) Conduct your own audit. Businesses can have great success when they go beyond what is required by the IRS.
7) If necessary, ask for the manager. Ask to meet the agents’ manager to resolve a question of law or fact. To its credit, IRS senior management actively encourages business owners to go up the chain of command to seek a resolution.
8) Mediation and arbitration. The IRS has significantly expanded the opportunity for taxpayers to seek a resolution through mediation and arbitration. While it is more art than science as to when it is appropriate, mediation and arbitration are great avenues to consider for solving a problem.
9) Appeals and litigation. From the moment you receive an audit notice, be aware you may have to seek a resolution either through mediation, arbitration, IRS appeals or even litigation. This means having a clear record of what facts were provided to the IRS and also ensuring the legal issues have been properly developed and put forward.
Contact Us: Small and medium-sized business owners need to know the IRS is stepping up its activities in this sector. Working with Daszkal Bolton’s accounting professionals throughout an IRS audit can greatly improve your chances of a better outcome. Please contact Sandy Smith, CPA, at 561.367.1040, or [email protected].