ARCHIVED  December 1, 1997

Tax audits require ample preparation

If your business is notified of an audit by the Internal Revenue Service, the first thing to do is determine what type of audit it is from the documents requested by the agency, says a Fort Collins certified public accountant.The IRS may want to audit the entire tax return or could audit just a portion of it — for example, meals and entertainment, automobile and travel expenses, said Kermit Allard, a local CPA.
If only a portion of the return is to be audited, Allard advises clients to bring only those records pertaining to that part of the return to the audit. A full audit will request all tax-return information for that year, he said.
The time needed for the process varies.
"If you˜re going in prepared, you can complete it in a couple hours," he said.
Allard said IRS audits are often prompted by large business losses over a period of several years, raising the question of how the owner made a living during that time. Large deductions for travel, entertainment and automobile expenses that don˜t appear to relate to the company˜s sales volume also can trigger an audit, he said.
Lauren Nelson, a Fort Collins CPA and past president of the Northern Colorado Chapter of the Colorado Society of CPAs, said that only about 1 percent of small businesses are audited nationwide.
"It˜s not so much a matter of avoiding them as being prepared," she said. "Don˜t try to represent yourself in an audit, even if your records are perfect."
Rather, she encourages clients to let their accountants represent them at the audit and answer all the questions posed by the auditor.
"You have to understand why the auditor is asking the question, so you need to know all the tax laws, not just the ones that apply to that certain area," she said.
She recommends that business owners speak only when spoken to at the audit. They should also be well organized when they attend audits, with ready access to any canceled checks or records so that the auditor is not kept waiting.
By giving their accountant the power of attorney, the business owner can be absent during the actual audit, she said. The business owner˜s absence also can give the accountant more time to respond to questions from the IRS agent because the accountant may have to confer with the client on some issues, delaying the progress of the audit, she said.
To prepare for the audit, a business owner needs to recall the events of that business year, who was employed by the company at that time, and any problems encountered that year, she said.
An audit of a small to medium-sized business may last eight hours, she said. While audits of a very small business may be conducted at the IRS office, audits of larger companies may be held at the business location.
Usually, there isn˜t much notice before an audit. It can be scheduled within a week or two of notice from the IRS, she said
At the end of the audit, the IRS agent will cite any problems with the tax return.
"It˜s like getting a traffic ticket," she said. "You know immediately."
After the agent informally advises the business owner of any adjustments needed on the tax return, a formal report is filed, said Susan Johnson, a CPA with the firm of Brock and Co. in Fort Collins.
"You can appeal it to their supervisor and beyond that to another level of the IRS in Denver," she said.
From that point, the ruling could even go through an appeals process in court. Johnson said she has seen adjustments of $500 to $2,000 ordered on tax returns as a result of an audit. While interest is applied to those adjustments, the IRS agent has discretion in regard to assessing penalties, she said.
"That˜s why it˜s important what your attitude is," Johnson said.

If your business is notified of an audit by the Internal Revenue Service, the first thing to do is determine what type of audit it is from the documents requested by the agency, says a Fort Collins certified public accountant.The IRS may want to audit the entire tax return or could audit just a portion of it — for example, meals and entertainment, automobile and travel expenses, said Kermit Allard, a local CPA.
If only a portion of the return is to be audited, Allard advises clients to bring only those records pertaining to that part of the return…

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