Capital Region corporate tax attorneys and advisers offer some tips for handling a review of your finances.
You hear those three little words: “You’re being audited.” Just the idea of an audit is enough to make your head spin, but for a small business owner, the process can cause more than just a headache; it can cost you your business.
An invasive, time-consuming review poses a threat to the future of any small business. But tax professionals say an audit does not have to be a negative experience. The ideal audit is supposed to be a learning experience, says Nicole Gould, an attorney with Breazeale, Sachse & Wilson. In fact, you can control the process.
With so many parts to the audit process, how should a small business prepare if the Tax Man comes knocking? Business Report asked corporate tax attorneys and consultants the secrets for surviving an audit.
Their collective advice: Stay calm, get organized and be nice. Otherwise, your auditor could become your worst nightmare. If your first reaction to an audit notification is panic, a bumpy road may lie ahead. Also, without a basic understanding of your tax obligations as a business owner and without proper preparation before the audit process begins, you could be faced with a very invasive audit from the IRS or the state.
Brandon Lagarde, a tax director at Postlethwaite & Netterville Tax Services Group, says the biggest challenge for small businesses stems from the tendency of entrepreneurs to be focused on making it through each day rather than on accounting.
Lagarde advises business owners to understand their tax obligations from the start, even if it is just enough to be able to turn the books over to a CPA for guidance or, in the event of an audit, directly to the auditor.
Understand your audit.
“First thing you have to do is nail down the type of tax being audited. You need to nail down the tax periods that they are auditing and which specific person or taxpayer entity is being audited,” Gould says.
“Then you want to nail down when the audit will occur, where the auditor is going to do it, and if they are coming on-site either at a corporate entity or home. You are going to want to know exactly when and the duration that they are going to be there. You are going to want to schedule an appointment. You do not have to suffer the whim of the auditor.”
Make it a learning experience.
“The majority of auditors really do want it to be a learning experience,” Gould says.
“If they see something you did right, they will give you credit for it. They are not all that way. As far as recordkeeping goes, sometimes people find out that they are not doing things the right way. It is almost impossible to do what you don’t know to do. Most taxpayers won’t know they’ve done something wrong until it is too late.”
Be nice to the auditor.
Despite popular belief, the auditor is not out to get you.
“They are not coming in to play gotcha,’ and they don’t believe you’ve done anything wrong,” Robinson says. “The goal of the audit program is to assist with compliance. They want to make sure you understand what your responsibility is and that you are getting it correct.”
So leave the negative attitude behind. “We tell our clients to be nice,” Lagarde says. “There is no reason to aggravate an IRS agent or appeals officer. Act respectful.”
A mistaken practice among businesses being audited is to make the auditor uncomfortable in order to get them out of your hair. “A lot of those auditors, they are uncomfortable, and they know how they’ve been treated,” Gould adds. “They are going to find a tax liability. They absolutely will.”
If possible, seek professional help.
Don’t wait until it’s too late to get the help you may need from a professional.
“Taxpayers come to me at different starting points, and the ones I feel the most sorry for are the ones that seek professional help too late,” Gould says. “Your tax rights move very quickly, and they are very short-lived. It is highly recommended that if the taxpayer can afford it, get a professional on retainer: someone that they can lean on.”
Gould says it can be either a tax attorney or a CPA, ideally a CPA who specializes in the type of tax being audited or has an industry specialty related to the tax being audited. “There are things the professional can do that taxpayers can’t do.”
Don’t volunteer anything extra.
Advisers says it is critical for a taxpayer to be as open as possible without giving away information that was not being sought in the first place.
Gould notes that an auditor will provide a list of materials to provide for the audit. Don’t volunteer anything extra unless a professional has guided you through it, she says.
“Make sure what they’ve asked you for is what you’re providing,” says Kimberly Robinson, a partner in the Tax & Estates Practice Group at Jones Walker. “Don’t give them open access to all of your books and records to allow them to go on a fishing expedition. Make sure you understand what they are asking for. Don’t be afraid to ask them to explain to you why they need specific information.”
Consider conducting a reverse audit.
A reverse audit is an audit that happens but in your favor. “Someone comes in and audits your books to find where you overpaid taxes or are entitled to a tax refund or if you qualify for a credit you forgot to find,” Gould says. “A lot of those guys will work on a contingency basis, so there is almost no risk to getting a reverse audit.”
Know your rights.
Gould advises the person being audited to look at the tax period being audited to determine if it is still open or if it is proscribed. “A collector cannot go into a closed period,” Gould says. “I also like to check jurisdiction. It is not so much an issue on the federal level, but it really can be in a state sales tax situation or income tax situation or even a property tax situation.”
Robinson says it is important to remember that you have appeal rights. The auditor does not make the final decision. In the event that there is an issue with the audit, Robinson recommends reaching out for help and going through the appeal process. Also, if your company is part of a particular industry, contact your trade organization to find out what potential issues may arise during the audit purely as a result of the nature of that industry.
Respect the timeline.
Procrastination can be your worst enemy during an audit. “Taxpayers have a lot of opportunities to present their case,” Lagarde says. “There is a six-month period where you are being notified by the IRS on a regular basis that there is something wrong with your account.” In general, the taxpayer has been notified and given ample time to respond or appeal before the process reaches the point of liens and levies. “The IRS gives you tiers of time to respond to their requests, and it is only people that don’t get help, do it themselves, or sit on it too long [who see] it start to snowball,” he says. “Being responsive within the time allowed is very important.”
Vet your auditor.
“Go ahead and ask the auditor if they are an employee of the collector or if they are a contract auditor,” Gould says. “The taxpayer has the right to be audited by someone who is not a bounty hunter.” Politely ask the auditor about his or her arrangement with the collector.
If state taxes are the issue, Gould suggests asking whether you qualify for a managed audit through the Louisiana Department of Revenue.
This allows certain businesses to conduct a type of self-audit, where you or your representative perform most of the audit functions with guidance and verification of a Department of Revenue computer audit specialist. You must meet certain criteria to qualify.
Remember, you know your business best.
You have to recognize that you are the person who knows the most about your business, Robinson notes. “So don’t be afraid to sit down and explain to the auditor about how you operate,” she says. “You are going to have to spend some time explaining and educating them on how you do business.”
Beware of scams.
If you get a call out of the blue from someone claiming to be from the IRS, informing you of an audit or back taxes owed immediately, it’s not the IRS.
A sophisticated scam is making its way across the country: Callers may be able to recite the last four digits of your Social Security number, spoof the IRS toll-free number on caller ID to make it appear the IRS is calling, and send bogus emails to back up their claim.
Here are the facts: The IRS will always send taxpayers a written notification of any tax due via U.S. mail. The agency will never ask for a credit card, debit card or prepaid card information over the telephone.
If you know or suspect you may owe taxes, initiate contact with the IRS yourself.
“We typically say, You are going to get a call from the IRS’ about an audit, but the IRS is going to initiate contact with you via correspondence or mail,” Lagarde says. “They are not going to call you or email you out of the blue without giving you correspondence first. Then you have to make that first contact with them after receiving a letter.”