LifeinAsia - 3:59 pm on Oct 20, 2009 (gmt 0)

As someone going through a corp audit right now...

The IRS is only interested in one thing income verses what you claimed as income.

Not exactly- they are interested in 2 things:
1) You reported all of your income.
2) All your reported expenses are legit.
(Actually, if you do business overseas, they are also VERY interested in any overseas bank accounts and how money flows back and forth.)

The audit letter should have stated specifically what the auditor wants to review, although he/she is pretty much free to ask for anything related to that year.

The auditor will most likely pour over all your bank statements for the year. Every deposit is deemed income and will be totaled and matched against your return. Although that sounds pretty straight forward, in reality, it isn't. Let's say that you were short of cash and took a $5,000 cash advance from your credit card to get you through. Well that $5,000 looks like income, so you'll need to document it as a loan (and also show how/when it was paid off). My advice: go through all your bank statements well before the audit and document/explain all deposits that are not actually income.

Oh, and I assume that your personal and business accounts are clearly separated and are never mixed. Otherwise, it's another can of worms to explain and will be very closely scrutinized. (You can do it- it just takes a lot more documentation/explaining.)

Other specifics/suggestions depend on your tax structure (sole prop, corp, etc.).

When the auditor is finished, he/she will most likely give you some homework for any answers/documents that were not be provided during the initial interview. He/she may have some follow-up questions after that as well. Once all the questions have been answered, the auditor will prepare you a report and submit it to you. Either the auditor will agree the tax return was prepared correctly or will list one or more "discrepancies" with a revised amount due (including any taxes/penalties). You can either agree or disagree with it. If you disagree, you'll most likely need additional documentation and supporting evidence. If you and the auditor can not reach a compromise, you can refer the issue to his/her supervisor for review. If you are still not satisfied with the results, you can continue to fight the matter in Tax Court.