Small businesses and their owners are frequently targeted for tax audits because their returns are more interesting to the IRS than the returns of simple W-2 wage earners. “A growing business typically has a lot of deductions, and while they may all be perfectly legitimate, the IRS watches that activity very closely,” explains Charles Sterck, Managing Director of Sterck Kulik O’Neill Accounting Group, Inc. in San Francisco. “The IRS won’t tell you why your return was selected for an audit, but a good accounting firm will be able to calmly work with their representatives and deliver exactly what they want to see—no more and no less.”
For more on effectively dealing with the IRS if your small business owes taxes, consider the following tips and information:
The importance of communication
If you’re behind on taxes and want to stay in business, it’s imperative to keep in touch with the IRS—even if the agency has left you alone for a while. “It can be scary for a small business owner to get a couple notices from the IRS, but the best thing to do is put aside that fear and carefully read the letters so you know exactly what you’re dealing with,” says Mr. Sterck. “Even if you discover the IRS wants to do a full audit of your business, it’s important to respond immediately so you don’t miss any deadlines. When you don’t respond to the IRS, they act on the worst-case scenario.”
Provide financial information
When it comes to presenting your company’s tax information to the IRS, Mr. Sterck advises to be as clear as possible. “In most cases, all the audit work is done before you actually meet with the IRS, so if you spend some time packaging your information so it looks understandable to someone who’s just glancing at it, the agent will be very pleased. Sometimes business owners are so busy that they neglect to keep crystal clear records. A quality CPA can come in and help package their information so it’s easily understandable by the tax authorities.”
Take a low-key approach
If an IRS agent finds an error in your tax information and you can prove it was an honest mistake, you can sometimes avoid incurring penalties. “That’s not a guarantee, but if you approach the process in a straightforward manner and treat the IRS agents like they have a job to do and aren’t the enemy, there’s a good chance you’ll see positive results,” says Mr. Sterck.
