How to Survive an Audit
August 8, 2009
Most of my clients have a healthy fear of being audited by the IRS. The mere thought of the IRS ever taking a look at the books is more than enough to keep most people honest. In fact, many people do not want to take legitimate deductions because they fear it might raise a “red flag”. What businesses need to realize is that they are far more likely to be audited by the Wisconsin Department of Revenue then they are by the IRS. Furthermore, the State tends to conduct more general and detailed audits than the IRS which generally conducts audits of specific items on your tax returns. With Wisconsin auditing aggressively here are a few things you can do to to be prepared when they knock on the door.
Keep Your Receipts
This sounds like a simple step, but it is amazing how many people do not keep most of their receipts. Unlike criminal law where you are innocent until proven guilty, tax law holds that you are guilty until proven innocent. The burden of proof is on you to prove that your deductions are valid and having a receipt is a key element of providing proof.
I would recommend that you keep your receipts in some logical order either by month or by vendor. This will make receipts easy to reference should you be audited.
Receipts should be kept for 7 years.
Keep Good Books
This sounds logical as well, but it is important that whomever is keeping the accounting records in your business at least has some working knowledge of accounting. If you know the basics the chances are that your records will be clean and organized which will demonstrate that you take your accounting seriously and will limit the amount of questions that an auditor must ask you.
Hire a CPA or Attorney
If you are going through an audit it is important to have a professional who has been through the process advocating for you. A CPA or attorney can talk to an auditor on a peer to peer basis and can also make sure that you are getting a fair shake. No one expects you to be an expert in tax law, so you will want someone who understands what an auditor is looking for and can answer the auditor’s questions in a clear and concise manner.
Meals, Entertainment and Travel
Auditors tend to examine these expenses more closely especially if these expenses are substantial. In addition to the receipts for these expenses it is helpful to document the reason for the expense, who you were meeting with, and what the business purpose of the expense was. Auditors want to make sure that you aren’t deducting your family vacation in the business.
Be Nice to the Auditor
Contrary to popular belief auditors are human beings. While they do strive to be professional it is probably impossible for them to keep their personal biases out of the engagement. I have seen clients be mean to auditors and in turn the auditor chose to scrutinize everything more closely. Conversely, I have seen cordial clients receive the benefit of the doubt on small issues. To be sure, being a nice guy does not allow you to ignore the law, but it can make the small issues easier to resolve.
Control the Flow of Information
Give the auditor the information they ask for and nothing more until they ask for it. Do not allow the auditor access to your employees. The reason you do this is to ensure the auditor does not see or hear something out of context that makes them want to expand the scope of their audit.
