When the IRS issues a request for information about a company’s tax returns, panic usually ensues.
There are things that small business leaders can do to handle the responses better according to Anthony Librot of Waldron H. Rand & Company, P.C.
Perhaps the most important thing Librot urges is that in responding, company management should remain calm.
He offers six tips to keeping calm and handling the request. They include:
- Respond Quickly. Gather all documents as quickly as possible to support your tax return. Expect the auditor to ask for basic information (i.e., W-2s and 1099s for individuals and your general ledger, balance sheets and income statements for businesses). They will provide you with a list of the expected items.
- Seek Expert Advice. Do not try to do this yourself. Always get expert advice from your accounting firm. The auditor and your accountant speak the same language. For more complicated audits you may need advice from an expert whose focus is tax law.
- Be Patient. The IRS and State do not move quickly. It could be sixty days before they read your letter of response. They’ll keep sending you collection notices so stay on top of this. Don’t get frustrated.
- Appeals are An Option. If you do not like the result of your audit, you do have the option to appeal. The decision of the auditor is not binding. However, going to tax court can be expensive and a long process, which will probably involve engaging tax attorneys. Decisions can be adjudicated on tax matters because it all comes down to the interpretation of the tax code.
- Cooperation is Critical. Carefully review all of your information to see if there’s something that you inadvertently missed. If you find something, let the auditor know immediately because self-disclosure always works in your favor. This sends a clear message that you are cooperating and trying to do the right thing. It’s better to work with the auditor and not against them.
- Change Behavior. If the auditor finds errors on your return you NEED to change your behavior. If sales or meal taxes were a concern, you can be certain the State will be scrutinizing this information carefully in the future so make sure you are doing this properly. They will be back to check on you.
Librot emphasizes the importance of addressing every tax notice received. “
If you can’t respond with all the information, be upfront and let them know that you are working on gathering the information and will get it to them at a specific time,” he adds.
Do not ignore the request no matter how minor it may seem. They won’t forget that you owe them information or a response,” Librot said.
Fear is often the most visceral response to an IRS request to small business leaders.
According to Librot, many targeted companies fixate on the question:
“What do I NOT know that they are going to find out?”
He points out that it is the responsibility of the Federal and State Taxing Authorities to verify that all information presented is correct. Therefore, if a company made its best effort to be honest in completing the tax returns, then even if something is wrong, the IRS may not be penalize it for some failure.
Large penalties are typically incurred when the auditor can prove that the mistake was a willful act and you knew you were doing something illegal.