What To Do If The Government Audits Your Tax Return - Consulting - http://maxpages.com/acebkping/What_If_Tax_Return

If you receive notice that the government is auditing you, your spouse, your dependents or your business, don't panic, talk to the government auditor only enough to refer him/her to us, and get organized and by no means make yourself sound as if you have little knowledge of your finances.

Just because your income tax return has been selected for audit, doesn't mean "they are out to get you".

It could mean that their system has selected your number for audit. Perhaps, your profession or business is part of a program to "test" compliance in the industry or a employer, co-worker, competitor or disgruntle employee "squealed" on you. The GOVERNMENT is suppose to tell you why your return was selected for audit, but generally will only respond upon us acting for you.

Why Did Your "Number" Come Up?

When income tax returns are filed in the GOVERNMENT Service Center, the information on the return is put into their system. Each return is assigned a numerical score that is arrived at by determining how far above or below the average each of your deductions are. Each deduction that you have taken that varies from the norm is added together and the total amount determines your numerical score.

The scoring system is a secret but our vast years of experience tells us what makes the score go up:

Low gross profit margin High auto expenses

High business and employment use of autos

Number of autos used in business or employment

High travel and entertainment

Little or no profit from business operations

The higher the number, or the more your deductions vary from the norm computed by the GOVERNMENT, the greater the chance of error on the return. Therefore, returns with higher numerical scores are the ones more likely to be audited.

You Ought To Know

It is also your prerogative to ask why your return was selected for audit. Even though the bulk of the returns audited are selected because of a high numerical score, other criteria for selection include informants, your relationship to another taxpayer who is being audited, being part of a special groups that has been singled out for auditing, or being part of an GOVERNMENT project such as the auditing of all employers who use contract labor.

Kinds Of Audits There are four kinds of GOVERNMENT audits.

Correspondence Audit is a letter from the GOVERNMENT Service Center requesting that you send in copies of your canceled checks and/or receipts in order to verify certain deductions on the return. This type of audit is reserved for small, simple tax returns and most likely you and your business will not be audited in this manner.

The notice of an office audit also arrives by mail. The letter identifies specific items on the return that are in question and requests that you or we to bring certain documents to the local GOVERNMENT office for the auditor's examination.

If your business is a small, sole proprietorship with sales under $500,000, you may be subjected to this type of audit.

With a Field audit, the GOVERNMENT agent, personally, will call you and notify him/her that the return has been selected for audit.

This type of audit is called "field" audit because the agent will want to conduct the audit at your home, from within the premises of your current employer or that of your place of business, rather than the GOVERNMENT office.

During the initial telephone contact, the agent will be asking for the following:

To interview the all sources residing and work with you

To arrange a date(s) to be at your premises.

To determine where the records are located

To provide a list of records that is to be made available

It is crucial that during a field audit, you retain our representation.

The GOVERNMENT agent is instructed to interview you, your family members,
your co-workers, customers of your business, suppliers of your business, business partners and their family members and go to your family members, your co-workers, customers of your business, suppliers of your business, business partners and their family members premises so that he/she can ask detailed questions about you or your business operations and see your and their its facilities.

We who handle GOVERNMENT audits regularly call this a "fishing expedition."

We will attempt to buffer you from this type of questioning and probing.

Our Role

Our overall goal will be to handle the audit in such a manner that your "exposure" is decreased. By exposure, we mean the risk that the agent will probe into the areas will your business is vulnerable, where the high risk items are, or where the most questionable deductions area.

We "limit the agent's scope" or limit the amount of information the agent sees or requests to examine.

One agents definition of "material" deduction will be $100 and the next will only look at items over $1000.

Attempts should be made to encourage the agent to have a high threshold of materiality, which means less documents you will have to pull from the file boxes.

An agent who dwells on small immaterial items if considered "picky" and can be frustrating for your as well as for us.

There is the risk that the agent will want to expand the audit into prior or subsequent year tax returns or will want to audit related sales, payroll or other tax returns. This should be discouraged because it increases your exposure and risk.

Every attempt should be made to answer the agent's questions and provide documents in such a manner as to discourage the "mushrooming" of the audit into other entities and issues.

The fourth type of audit is a TCMP audit, Taxpayer Compliance Measurement Program audit. The primary purpose of this type audit is to update the data used to write the scoring program. It involves a total audit in which every part of the return must be substantiated by documentation.

What this means to you and your business is time.

A "regular" audit is time-consuming in that your staff must find checks, invoices, contracts, bank statements, etc. for the items selected for audit.

In a TCMP audit, each and every line of all income, sales payroll and other tax returns is audited, therefore you have to provide documentation for all deductions and not just a selected few items.

Don't chatter or exchange casual conversation.

Each comment only gives them more information, which will be used against you.

Stay calm! Don't be argumentative or belligerent.

Insist on getting copies of information in their files or copies of anything you sign and assure the auditor signs each to confirm it came from them.

• Better yet, wait until we had time to review the document before you sign it.

How Can We Help?

1. AT THE BEGINNING

By consulting with us up front, you can learn what to expect from the GOVERNMENT person, what questions that you will be asked, and what documents they will require.

BE PREPARED! It is like any football game. You must study the opponent and develop a game plan accordingly.

2. IN THE MIDDLE

We can act for you before the GOVERNMENT audit in your place.

Since will allow you avoid being caught off guard, avoid loss income, less emotional for you, offer more defensive techniques and more able to negotiate strategically on THE LAW.

Since we speak the same language as the GOVERNMENT person and can reference to actions they took in matters of others similar to your situation, which would require they act in the same manner in your case.

3. THE END

Don't sign anything until you fully understand the document and agree with what it says.

If you want us to review it beforehand is your prerogative and need only specify it to the auditor

Is The Decision Of The Auditor Final?

When the GOVERNMENT agent/auditor presents you with a bill, you have the option to agree and sign the document or disagree and request a hearing.

But, whichever one you may be confronted with, remember to stay calm and get organized.

For instance, pull all your canceled checks, receipts, and other information related to the items to be audited and get that information in sequential order.

By providing the information to the agent/auditor in an organized manner, it limits the amount of information that is exposed to GOVERNMENT scrutiny.

Organized records also have a tendency to make the agent/auditor think you are a "squeaky clean" taxpayer and may result in the agent/auditor limiting their scope.

Timely Response To The Agent/Auditor's Request Is Crucial!

Timeliness makes it look as if you have nothing to hide and it limits the amount of time the agent spends looking at your information. In both instances, the risk of the agent/auditor finding a "mistake" has been reduced.

Options For Handing An Audit

Whether you prefer to handle the audit yourself or have us act for you, your presence will increase the risk that the agent/auditor will ask questions that you would prefer not to have to answered and likely place undue attention upon yourself.

There is no such thing as idle conversation with a person from the GOVERNMENT.
Each question has a purpose and that purpose it to get information, which will indicate that you have under reported your income or over stated your expenses.

If your do choose to handle the audit yourself, here are some basic to do and not do.

Be organized.

Give them only the documents needed to support the deduction being questioned.

Never give the GOVERNMENT agent more or less information than is requested.

Answer questions honestly, but briefly.

Never give the GOVERNMENT the only copy of a document.

Do not leave your original records with the GOVERNMENT.

The GOVERNMENT is suppose to inform you of your appeal rights.

A part of the up-front planning of an audit, is the discussion of the appeals process and how best to make will work for you

Bottom Line

Regardless whether your return was prepare by yourself, another accountant or a relative, you are responsible for it's contents.

You need to review all tax returns closely before signing them and mailing them to the GOVERNMENT.

Should the return be selected for audit, how we will handle the audit will be determined by the following factors:

Your attitude toward the GOVERNMENT - Is it hostile, defensive, one of fear, or one of co-operation?

Items questioned - Has the GOVERNMENT selected high-risk items or is there risk that with additional probing the high-risk items will be "discovered?"

Personal and political pressures - Is your goal just to get the GOVERNMENT out of your life as quickly as possible?

Records - Are most records available or have some been lost, stolen, or destroyed or have multiple overlapping duplicate records?

MONEY - The cost to you in professional fees will be significant but the cost in terms of time and stress will be greater to you if you have no representation at all.

Less than 2 to 4 percent of the tax returns that are filed are audited.

If you number comes up, be prepared to get things organized and to present yourself in the most favorable light possible.

A big part of handling an GOVERNMENT audit is communication and the ability to manage difficult personalities.

If you have these skills, you may want to handle the audit yourself.

If not, you should consult us immediately before it becomes costly and frustrating.

STANDARD AREA'S TAX DEPARTMENTS CHECK

Because the government claims that most tax cheats are in the ranks of the

self-employed, it is not surprising that this group is more closely scrutinized than are wage earners.

If you are self-employed and the government chooses to come after you by way of an audit -- or worse, a criminal investigation — be aware that the agency can and will obtain your bank and other financial records.

If you are investigated, expect the government to ask the following questions or look into the following issues:

• Did you report all of your business sales and receipts?
• Did you write off any personal living expenses as business expenses?
• Does your lifestyle apparently exceed the amount of self-employment income
reported?
• Did you write off automobile expenses for travel that was not business-related?
• Did you claim large business entertainment expenses?
• Are your workers wrongly classified as independent contractors when they are
legally employees?
• Are you making payroll tax deposits?
• Are you reporting all cash transactions — especially large cash transactions?
Payroll Taxes

If you have employees, always make payroll tax deposits when they are due.

Never borrow from your employees' tax funds.

Even if you eventually make the payment to the government, the penalties and interest can be substantial.

Pay the government first, not last.

If you can't pay, then maybe you shouldn't be in business.
One good way to see that payroll taxes get paid on time is to use a payroll tax service to both file and make all payroll tax deposits.

Cash Businesses

If your business deals in a lot of cash -- for example, you run a bar, a restaurant, vending machines or a laundromat ~ the government may suspect you of skimming cash off your receipts.

The audit potential of cash businesses is much higher than average

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The herein is made available with the understanding that Ace Bookkeeping Services, its employees, officers and agents are not responsible for the results of any actions taken, whether inherent therein or foreseeable or not, on the basis of the information within the hereinattached, nor any errors or omissions.

Ace Bookkeeping Services expressly disclaim any and all liability to any person or corporation, whether a user of the hereinattached or not, in receipt of anything and the consequences of anything done or omitted to be done by any such person or corporation in reliance, whether whole or partial, upon the whole or any part of the contents of the herein.

ACE BOOKKEEPING SERVICES REG'D

Tel & Fax: (514) 696-5322 If Busy: (514) 696-9253

CALL: STEVEN GOODIN

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Page Updated Mon Jan 19, 2009 2:14pm EST