It is that time of year again when people start contemplating filing their tax returns and wondering, perhaps how to respond to an Internal Revenue Service audit and avoid penalties, should an audit be requested. If you are facing an audit of your California business taxes and after reviewing your returns see that you did indeed make a few mistakes, should you just file an amended return and skip the audit?
Never ignore an audit request. Either you or your tax professional should call the number on the form to discuss the audit details. If you had your taxes prepared by a tax professional, he or she is the best person to represent you in an audit. You can still hire an enrolled agent to represent you even if you prepared your taxes yourself. You can also inquire with a Certified Public Accountant to assist you, as long as he or she has experience with IRS audits.
If you at all suspect the audit could be based on criminal accusations or could become one at some point, consult with a tax attorney. Two things to keep in mind are that the IRS is looking to determine if the business expenses you listed are indeed business-related and whether you reported all your income accurately. If your business is part-time and you have a different full-time job, the IRS will try to show your business is actually a hobby designed to look like a business to generate certain tax deductions.
Look out for errors when the IRS adds up all the deposits in your bank accounts as not all deposits are income. For example, bounced checks may be deposited twice or transferring money from one account to another could be incorrectly considered income by the IRS. It will be important for you to identify deposits that are not actual income, and this may be especially important if your business is showing a loss.
When it comes to deducting mileage allowances, keep good records, including starting points and actual miles travelled per trip. This will help ensure your mileage calculations are documented and thus deductible. We will continue this topic next week and discuss how to avoid those nasty penalties in an audit.
Source: The Wall Street Journal, "Surviving the dreaded IRS audit," Eva Rosenberg, Jan. 11, 2013
Our Alameda County, California, law firm helps businesses and individuals with tax issues, including IRS audit defense.