Who's Afraid of the Big Bad Tax Auditor?
© by Fred W. Daily
"It is not the thief who is hanged, but one who was
caught stealing." H. L. Mencken
There are a lot of myths surrounding the dreaded IRS audit process. In reality,
an audit is an examination of you and your tax return. The IRSs goal is to verify
that your tax return accurately reflects your income and tax-deductible expenses. Besides
looking at your records, auditors make subjective decisions about your honesty--or lack
thereof. After all, auditors are human, or so the rumor goes.
Who gets audited? A small business owner is four times more likely to be
audited than other folks. Although odds are low in any one year, if you are self-employed
for a while the chances are youll be audited. And if significant irregularities are
found, audit lightning is likely to strike again. A handful of business owners with a
record of being fast and loose are audited every year or two.
- In a small business audit, you must convince the IRS that your venture reported
all of its gross receipts and was entitled to any deductions that are questioned. In
legalese, this means you have the "burden of proof;" however, if your case ever
gets to court, the burden may shift to the IRS, depending on the circumstances.
- Dont be in a hurry to get an audit over with. Delays usually works to your
advantage, as the IRS is under internal pressure to finish its cases, and there is a
statute of limitations on time to audit. By law, most audits must be started and finished
within 3 years of the filing of a tax return.
- You may keep the IRS from holding an audit at your place of business--which is
usually a good strategy. This way the auditor cant get any false impressions of your
success from looking at your setup or talking to your personnel.
- The Taxpayer Bill of Rights provides that you may hire a tax pro to handle an
audit, and not have to meet the IRS auditor face to face. Its a tax deductible
- Dont expect to come out of an audit without owing something the
odds are against you. Only about one in ten audit victims get off scot-free or with a
- Complain to the auditors manager if you are being treated unfairly.
Dont be concerned about the auditor retaliating for going over their head. Believe
me on this.
- If you lost receipts or records, try to reconstruct them by other means--memory,
calendars, statements from other folks, and any partial documentation you can find.
- While auditors rarely charge anyone with tax fraud, if you have major skeletons
in your closet, step away and bring in a tax pro to handle the audit.
How to prepare for, avoid and defend yourself in an audit is covered in detail
in my book, Stand Up to the IRS (Nolo Press).
Look for it at major bookstores and online from Amazon.com. This article was adapted from
By: Frederick W. Daily, Tax Attorney,
John Raymond, Bankruptcy Attorney, and
Allan H. Rosenthal, paralegal.
All of the three have offices in San Francisco.
(This article was originally written for tax
practitioners who represent clients before the IRS. But the information
presented here is valuable for all taxpayers.)
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