Tax Audits - What to Do (And NOT Do) In A Tax Audit
The IRS uses a "point" system to pull taxes for audits. That means that if you got away with heavy expenses in one line item (marketing expenses) for one year you were probably under their points for that year, but it you do it again (and again), you'll get audited for that next year - Because you reached their "point" limit and "points" carry forward.
My experience in both the USA and Canada with the IRS and CRA tells me that the systems are much the same. These Do and Don't Tips are relevant for both countries, but if you are unsure about an item or a write off, then always check with your local Accountant or tax agency.
You may also be selected for an audit at random because something looks funny - That means that if you have a cookie company and you spend $10,000 on office supplies and $2,000 on cookie dough then you'd better have a real good reason why you did that (first year in business only works for the first year in business).... Also, if you had $5,000 in Entertainment expenses and you own a dog grooming salon, the same is true. Pets listed as dependents - Don't go there.
If you reported all of your income and were reasonable with your expenses then you are fine - Reasonable and Related are the two most important criteria in a tax audit. Once you are notified that you are selected for an audit, respond quickly. Do not put it off. They have no intention of going away and it will irritate them that you didn't take them seriously enough to respond within a reasonable period of time. That's when they begin to seek out your assets and yes, they will find them.
It is perfectly acceptable to have your accountant respond on your behalf. You will need to complete a power of attorney form for that person to respond for you and speak on your behalf, but it is well worth the stress relief to let someone else (Who is used to talking to revenue agents) speak on your behalf. Secondly, your ability to negotiate isn't compromised if you contact them promptly.
Give them what they ask for. Do not volunteer additional information. That's why sometimes it is better to let a professional go or speak on your behalf. You may be really proud of your business, but it could cost you dearly to blither on about it. Give them the fish they ask for, not trolling rights to the rest of the pond. They are only looking to substantiate the information you provided on your return. If a meeting is scheduled, try to make it at your accountants office. You'll have less disruption and your audit will probably go much better.
Be sure to review their adjustments thoroughly. Even tax auditors can make a mistake (or two). If you have some grey areas or places that need some interpreting then be sure to negotiate those things. At least make that attempt, because you may get them to see your point of view - especially if there is a history of something that you can recite as well. Auditors don't ALL wear pocket protectors. If you feel anxious or uncertain (in any way) then consult a professional. Misunderstandings of rules and tax laws are common. Your accountant professional can help you explain those kinds of things in "tax terms" so that they make better sense.
This is worth repeating - Do not volunteer information that is not requested unless it helps you. Ask what they need and give (ONLY) that to them. You will appear to be irritating and they may not have the patience for you for that. Do not feel like the auditor has the absolute final "say." Ask your accountant or the auditor supervisor if you feel that your information has not been interpreted correctly according to the legislative rules.
Do file an objection, or a 'not in agreement' with the results as quickly as possible so that you are not compromised by a past due deadline date. Looking forward to a tax audit is like looking forward to a root canal. These simple tips can help you take the pressure off. Just follow the rules, don't go in like a prize-fighter and aggressively argue your points (If you are aggressive then you are just running with scissors) and you'll be fine. That's how to be a winner in an audit.
Sources: http://www.salestaxstrategies.com/sales-tax-audit-defense.html http://ezinearticles.com/?Tax-Audits---What-to-Do-(And-NOTDo)-In-A-Tax-Audit&id=5455004