by Deborah Sweeney | Featured Contributor
No matter how big or small the company is, there is nothing more frightening for a business than being audited. Auditors are the small business bogeymen, and everyone has a story about a friend of a friend who was hit with an audit and wound up paying out the nose. Even if you’ve done absolutely nothing wrong, a notification of audit is enough to send you into a panic. Before you start panicking though, it’s important to note that audits, while certainly an inconvenience, are really nothing to worry about, especially if you know what to expect before going into one.
The IRS uses a computerized scoring system
The IRS uses two computer-generated scores when selecting returns to audit. The Discriminant Function System, or DIF, scores tax returns based on similar past returns. Then the Unreported Income DIF score rates a return based on the potential of there being unreported income. If your return scores too high, the IRS takes a closer look. Be aware, however, that the IRS also pulls returns randomly for auditing, so there is no surefire way to always avoid an audit.
Beware audit triggers
Before you go into your audit, review your returns and see if you can find any possible triggers or discrepancies. It’s generally accepted that claiming deductions like a home office, business mileage on a personal car, or partial business use of personal assets can all trigger suspicion. Unfortunately, this puts home-based businesses in the IRS’s crosshairs, as they are most likely to claim all of those deductions. Keep in mind, however, that no one knows for sure what sorts of deductions can trigger an audit – the IRS tries to keep its system a secret.
You do have rights as a taxpayer
If you are targeted for an audit, remember that you do have rights and are not at the complete mercy of the IRS. Publication 1, Your Rights as a Taxpayer, lists the declaration of taxpayer rights, and the IRS will likely advise you on your rights before beginning the audit. Amongst those rights are the right to know why the IRS is asking for information, a right to representation, and a right to appeal.
Be neat, nice, and quiet.
No one likes being audited, but it’s important to treat your auditor with respect. As tempting as it may be to fling a shoebox of old receipts at them and tell them to figure it out, the more work you make for your auditor, the deeper they’ll dig into your finances. Keep all of your paperwork in order, and be courteous. At the same time, remember not to reveal anything more than what they ask for, and don’t offer any documents that don’t pertain to the year being audited.
Try to relax
The United States tax code is confusing, to say the least. The actual tax code is 5,000 pages long, and the comprehensive guide published for tax professionals is over 75,000 pages. More often than not, it’s the general lack of knowledge about our own tax code that causes so much panic and apprehension during tax season. We fear what we don’t know, and there are few people that can claim to know the intricacies of the US tax code. Relax and stay calm throughout the audit. Panic and you’ll misplace paperwork, talk too much, and snap at your auditor. Relax, review your returns, and the whole auditing process should go smoothly. You never know – they may even find deductions you missed!
Deborah Sweeney – Legal Expert, CEO, MyCorporation.com – Calabasas, CA
As CEO of MyCorporation Business Services, Inc. (MyCorporation.com), Deborah Sweeney is an advocate for protecting personal and business assets for business owners and entrepreneurs. With her experience in the fields of corporate and intellectual property law, Deborah has evolved from lawyer to business owner. She has extensive experience in the start-up and entrepreneurial industry as she has been involved in the formation of hundreds of thousands of businesses for MyCorporation.com’s customers.
Ms. Sweeney received her JD & MBA degrees from Pepperdine University. She is active in the community and loves working with students and aspiring entrepreneurs. She serves on the Board of Regents at California Lutheran University and is a founding member of Partners of Pepperdine. Deborah has served as an adjunct professor at the University of West Los Angeles and San Fernando School of Law in the areas of corporate and intellectual property law. Ms. Sweeney is also well-recognized for her written work online as a contributing writer with top business and entrepreneurial blogging sites. She is a regular contributor on Forbes, American Express, Social Media Today, and BlogHer among many others.
In her ‘free’ time, Deborah enjoys spending time with her husband and two sons, Benjamin (8) and Christopher (6). Deborah believes in the importance of family and credits the entrepreneurial business model for giving her the flexibility to enjoy both a career and motherhood. Follow her on Twitter @deborahsweeney and @mycorporation.