What to do when you receive an IRS audit notice?

First and foremost; do not overthink the situation.. Receiving a notice for audit does not mean that you did something wrong, it means that the computer flagged your return based on  a complex set of algorithms and variances from the national averages for income and expenses inyour business industry as well as a variety of other inputs that not many know about.. These variances can often be explained; maybe you live in a city where costs are higher, maybe you advertise aggressively, maybe you recently started the business and are running at a loss to cover growth. Whatever the case may be, if you have received an audit notice from the IRS and have read to this point you probably want to know what your next steps should be.

Step one:

Review the audit notice, information document request and publications regarding your rights as a taxpayer. Determine the location of your business records and if they are sufficient to answer all of the government’s questions.

Step two:

Review the contact date from the IRS and determine if you will be handling the audit yourself or if you wish to have someone represent you (preferably Ballew & Fuhrman, CPAs). Either contact the IRS or have your representative complete a form 2848 (Power of Attorney) and contact the IRS themselves by the date listed on your audit notice.

Step three:

Don’t over-worry about the situation. If you contact the IRS yourself don’t act defensive or rude towards the IRS agent. While you may be upset that you’re getting audited you have to remember that the specific agent you are contacting did not hand pick your return for audit and is simply doing their job. By acting overly upset or rule you are giving off the appearance of having something to hide which could encourage the government to spend more time reviewing your case.

Step four:

Gather the documentation requested on the form 4564 (Information Document Request) and either send it directly to the IRS or send it to your representative if you are letting them deal with the audit.

Step five:

Meet with the auditor to conduct an interview and go over your documentation or have your preparer complete this step. Generally at this point I would recommend you to have a representative involved so that the scope of the audit is as limited as possible but if the situation is simple enough or obtaining representation is not in the budget remember that if you do not feel comfortable at any point during the interview you can request to end it and seek help at that point.

Step six:

Once the auditor has received all of the information requested they will determine the outcome. If everything is correctly reported on your tax return you will receive a no-change report. You are finished at this point. If, however, there end up being issues on your return you will generally receive a report showing you the total adjustments made, reasons for those adjustments and the amount of additional taxes due. If additional taxes are due the auditor will likely want to look at prior and subsequent tax returns as well to see if the same mistakes were made.  If you are issued a report with additional taxes due remember that you do not have to agree with the auditor’s findings. You always have the right to appeal the report and absolutely should if you stand by your original return.