© by Fred W. Daily

"It is not the thief who is hanged, but one who was caught stealing."— H. L. Mencken

There are a lot of myths surrounding the dreaded IRS audit process. In reality, an audit is an examination of you and your tax return. The IRS’s goal is to verify that your tax return accurately reflects your income and tax-deductible expenses. Besides looking at your records, auditors make subjective decisions about your honesty--or lack thereof. After all, auditors are human, or so the rumor goes.

Who gets audited? A small business owner is four times more likely to be audited than other folks. Although odds are low in any one year, if you are self-employed for a while the chances are you’ll be audited. And if significant irregularities are found, audit lightning is likely to strike again. A handful of business owners with a record of being fast and loose are audited every year or two.

• In a small business audit, you must convince the IRS that your venture reported all of its gross receipts and was entitled to any deductions that are questioned. In legalese, this means you have the "burden of proof;" however, if your case ever gets to court, the burden may shift to the IRS, depending on the circumstances.
• Don’t be in a hurry to get an audit over with. Delays usually works to your advantage, as the IRS is under internal pressure to finish its cases, and there is a statute of limitations on time to audit. By law, most audits must be started and finished within 3 years of the filing of a tax return.
• You may keep the IRS from holding an audit at your place of business--which is usually a good strategy. This way the auditor can’t get any false impressions of your success from looking at your setup or talking to your personnel.
• The Taxpayer Bill of Rights provides that you may hire a tax pro to handle an audit, and not have to meet the IRS auditor face to face. It’s a tax deductible expense, too.
• Don’t expect to come out of an audit without owing something — the odds are against you. Only about one in ten audit victims get off scot-free or with a refund.
• Complain to the auditor’s manager if you are being treated unfairly. Don’t be concerned about the auditor retaliating for going over their head. Believe me on this.
• If you lost receipts or records, try to reconstruct them by other means--memory, calendars, statements from other folks, and any partial documentation you can find.
• While auditors rarely charge anyone with tax fraud, if you have major skeletons in your closet, step away and bring in a tax pro to handle the audit.

How to prepare for, avoid and defend yourself in an audit is covered in detail in my book, Stand Up to the IRS (Nolo Press). Look for it at major bookstores and online from Amazon.com. This article was adapted from the book.

By: Frederick W. Daily, Tax Attorney,
John Raymond, Bankruptcy Attorney, and
Allan H. Rosenthal, paralegal.
All of the three have offices in San Francisco.

© 1997

(This article was originally written for tax practitioners who represent clients before the IRS. But the information presented here is valuable for all taxpayers.)

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