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Small Business Audited by the IRS? Don’t Panic: Here’s What To Do

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If your small businesses has been flagged for an audit by the IRS, then there’s a good chance that even if your tax filings are flawless right down to the last deducted stamp and pen, that you’re not feeling all that great. In fact, you’re probably somewhere on the panic scale, between anxiety and full-blown freak out.

For starters: this reaction is not just normal, but it’s something that the folks at the IRS have invested in and cultivated for decades. Unlike some organizations that go out of their way to rehabilitate a less-than-friendly image, the IRS leverages the fact that it owns one of the most alarming acronyms in the business world. It helps keep taxpayers compliant, and that’s the IRS’s end game.

With this being said, an audit doesn’t mean that you’re going to be ushered into a small room, installed beneath a 100-watt light bulb, and worked over by the gang from the X-files. Audits happen all the time. Some of them are triggered by red flags — such as what appears to be exaggerated or questionable deductions — and some of them are purely random.

Regardless of what prompted the IRS to take an interest in your small business’s tax returns, the fact remains that you’re on the radar screen and the process is in motion. That means procrastinating or hoping that the IRS gets busy and forgets about you aren’t options. But then, panicking shouldn’t be either.

Here’s what to do:

1. Gather all of your financial documentation for the tax year under audit.

In an effort to be efficient or simply to demonstrate that they are compliant and law abiding, some taxpayers under audit bring in several years’ worth of tax records. This is a mistake! Only bring in receipts, tax records and other financial documentation related to the specific tax year under audit. If the IRS wants to explore more years, don’t worry: they’ll tell you. Until that happens, stay focused and don’t do their work for them.

2. Listen to your tax lawyer.

If you wisely hire an experienced tax lawyer to represent you before, during and after your IRS audit, then simply put: listen to him or her! That means don’t have “side conversations” with your accountant or bookkeeper, or try and contact the IRS directly in an attempt to straighten things out. These efforts will backfire. Your tax lawyer is your sword and shield during this time, and your very best source of advice and guidance.

3. Stick to the facts, and only the facts.

Whether your audit is a correspondence-based or in-person (either at the IRS, at your business, or where your financial documents are kept), it’s essential for you to stick to the facts. Anything extraneous opens the door for IRS agents to explore other potential avenues. Remember: this is an audit, not an assessment or an evaluation. Yes, you must answer all questions honestly and fully to the best of your ability. No, you don’t have to start talking about your brother-in-law, or that “you think you might have made a mistake” on a different year’s tax return. Again, hiring a good tax lawyer will help you from heading down the wrong path.

The Bottom Line. 

Finding out that your small business is getting audited it scary and stressful. But be assured: it’s not the end of the world. Just keep the above tips in mind, stay focused and calm, and you’ll be fine — and so will your small business! Want to avoid an audit altogether? Check out this article on avoiding a tax audit.

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Young Upstarts is a business and technology blog that champions new ideas, innovation and entrepreneurship. It focuses on highlighting young people and small businesses, celebrating their vision and role in changing the world with their ideas, products and services.

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