Surviving a Tax Audit

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    Irecently saw a survey that asked ordinary

    Americans the two situations that wouldinstill the most fear and panic withinthem. The results from this survey were

    interesting. The most feared situationwas an insect swarmand the secondmost feared situation was an IRS audit. AsPCOs, I think we can handle the first itemfor ourselves and for our clients. But whathappens if one day you go to your mailboxand pick up an envelope addressed to you

    with a return address from The U.S. Trea-sury Internal Revenue Service stampedOfficial Business. Nothing strikes anemotional chord with small business own-ers like the prospect of a tax audit.

    In this case there might be a full tax au-dit looming; however, many times theseenvelopes contain a letter stating that amath error was made or that they receiveda 1099 from a payer linked to your taxidentification number that you failed toinclude on your return. In this case, youconfirm the error and pay the additionaltax, penalty and interest. If the IRS is notcorrect in their assertion then you havethe opportunity to return the letter with

    your explanation and wait for a response.In any event if, in fact, you do owe the ad-ditional tax and you have a reasonable ex-planation for the error, the IRS may abatethe penalty if requested.

    SURVIVINGAN IRS TAX AUDITA PCOs guide for dealing with

    this unpleasant experience.

    By Daniel S. Gordon, CPA

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    60 /// OCTOBER 2011 WWW.PCTONLINE.COM

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    and 1099s issued for the same rea-son in (3) above proving that youdid in fact hire a professional rath-er than calling someone on your

    staff a professional and paying himwithout remitting payroll taxes.

    5. Travel, Meals and Entertain-ment Calendars, diaries, ap-pointment books and logs shouldbe kept documenting any legiti-mate expense as this is one of themost abused deductions and with-out such evidence an auditor maydisallow the entire deduction.

    6. Office Expense You shouldhave receipts, cancelled checks,credit card statements to sub-stantiate office expenses. Many

    times auditors may look for largefurniture and fixtures that wereimproperly expensed and shouldhave been capitalized and depreci-ated over several years.

    7. Other Miscellaneous ExpenseFor most companies this is adumping account for expendituresthat cannot be categorized eas-ily. If you have a MiscellaneousExpense account make sure theitems in it are legitimate deduct-ible expenses.

    PREPARATION & ORGANIZATION.The most important thing you can dois come prepared and be organizedin category and chronology. This willbuild credibility with the auditor as

    well as make his or her job easier.While its no guarantee of a favorableoutcome, its just human nature torespond more favorably to those whomake things easier and it is no differ-ent with an auditor. The one thing

    you want to avoid is giving too muchinformation. Only volunteer what isasked for and nothing more as provid-ing too much information results inadditional work for the auditor. You

    want to make the auditors job as easyand efficient as possible so that youcan move through the audit process

    with as little pain as possible.

    The author is a CPA and owns an account-

    ing firm that caters to PCOs throughout the

    United States. E-mail him at dgordon@gi-

    emedia.com.

    /// BUSINESSISSUES

    62 /// OCTOBER 2011 WWW.PCTONLINE.COMCOMwww.pctonline.com/use reader service #xxwww.pctonline.com/use reader service #xx