How do I be prepared in case my business gets audited by the IRS… and what to do after.

Are you self employed or do side work gigs as an independent contractor?

Here are some ways to be prepared before hand in case you later get audited.

✔️Have a separate checking account where you deposit income from your business and make business expenses out of. Don’t mix your personal income and your business income in this separate account.
✔️Keep good business records. Software like Quickbooks or Xero can make this easier. As a business owner, even if it’s just a side gig, you need to have a profit and loss statement at the end of the year showing all your business income and business expenses. You will get taxed on your net income, so keeping track of your ordinary business expenses is very important.
✔️Keep your receipts, especially for large purchases. An easy way to do this is always get your receipts emailed to an email dedicated for business purposes or have a special email inbox just for receipts.
✔️ Make sure you are making estimated tax payments on your net income each quarter. If you don’t know what this is it’s time to learn!
✔️ Have a written business plan and update it as your business changes.
✔️Have a professional prepare your returns and ask them about any expenses you want to claim as a business expense but aren’t sure about.

If you do get audited it is generally a good idea to seek out a professional with experience defending audits.

An IRS audit generally starts with an Information Document Request (IDR) letter. The examiner (auditor) requests specific documents and responses from the taxpayer and gives the taxpayer a deadline to respond by. There are different types of audits. If its a correspondence audit it will only be conducted by mail correspondence. If its an office or field audit there will be a specific revenue agent or examination office assigned to audit the taxpayer. The IRS examiner will also want to interview the taxpayer.

It is a tax payer’s right to be represented and generally it is not a good idea for a taxpayer to represent themselves during the interview or in responding to the IDR.

If you disagree with the findings of the audit you can request to speak with a manager. You also have the option of appealing the audit or requesting a reconsideration so long as the statute of limitations for doing so has not passed.

About the author: Matthew W. Camphuis is an attorney licensed by the California State Bar and the Central District Court. He focuses on IRS tax debt controversy, IRS tax audit defense, California State Tax Controversy, chapter 7 bankruptcy, and wills and trusts. His office is located in Ontario, California and he serves the Inland Empire and High Desert communities in Southern California.

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