Q: I run a small IT business & was informed about an IRS Audit. Are there any tips on how to prepare for this. I have never experienced this personally or professionally.
A: You need to talk to the auditor only enough to refer him/her to your tax professional, and get organized. Just because your income tax return has been selected for audit, doesn't mean "they are out to get you". It could mean that the computer has selected your number for audit. Perhaps, your biz is part of a program to "test" compliance in the industry. The IRS is supposed to tell you why your return was selected for audit. When income tax returns are filed in the IRS Service Center, the information on the return is put into the computer. 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 experience tells us what makes the score go up:
Low gross profit margin; High auto expenses; High business use of autos;Number of autos used in business; High travel and entertainment;Little or no profit from business operations. Recently, interest expense has become a high-risk audit item. The IRS is auditing interest on businesses to assure that it is business and not personal interests. Before long, they will be enforcing those complicated "interest tracing rules."The higher the number, or the more your deductions vary from the norm computed by the IRS, the greater the chance of error on the return. Therefore, returns with higher numerical scores are the ones more likely to be audited. 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 IRS project such as the auditing of all employers who use contract labor. Correspondence Audit is a letter from the IRS 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 your business will not be audited in this manner.
For further answer visit: http://www.asktaxguru.com/8035-small-it-business-and-irs-audit.html
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