To say that audits are slightly stressful for California business owners may be the understatement of the year. For many people in Sacramento County, audits can be one of those most intimidating parts about running a business. Even savvy business owners get nervous when the IRS comes knocking and demands to find out the company’s financial inner workings.
Fortunately, there are a number ways of dealing with an audit. Oftentimes, the IRS will simply send out a letter that claims there was a math error in the tax filing. Other times, the agency will indicate that it received a 1099 form that wasn’t included in the tax returns that were originally filed. Though the IRS may require a penalty fee after the error is confirmed, this is usually only a minor setback. If it turns out there is actually no error, then the only necessary step may be to send a letter to the IRS with an explanation and a request to have any tax penalties waived.
When a mistake isn’t so simple and there is a request for a field audit, the situation is considerably more stressful for business owners. Still, there are workable solutions. For people who practice good bookkeeping, the best response may be as simple as submitting those records to the IRS, which will then match the recorded expenses with the ones listed on the tax forms.
In particular, the auditor will want to look into the records of your revenues, employee compensation, payments to outside contractors, professional fees, office expenses, travel, meals, entertainment, and any other miscellaneous costs. In any case, you will want to have a carefully planned strategy before meeting with an IRS auditor. Moreover, state and federal tax codes frequently change, and any California business owner going through an audit will want to be aware of those changes to ensure a favorable outcome.
Source: Lawn & Landscape, “Surviving a tax audit,” Daniel S. Gordon, April 25, 2012
