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Tax audit
What do I show them?

 1:32 pm on Oct 20, 2009 (gmt 0)

I just received notification of a tax inspection scheduled a week from now. I was wondering - besides accounting papers, what can they make me show them? I am sure that they are not familiar at all with what I do. Can they request access to my affiliate/Adsense/Adwords accounts to match earnings/spendings with my bank statements? I always report all my earnings, but this business model is not perfect when it comes to all the papers they usually require (contracts, invoices, etc).



 1:49 pm on Oct 20, 2009 (gmt 0)

As little as possible. Most likely they will come in with a list of what they want.
The IRS can request anything and everything. Call your accountant and ask him what might be required.


 2:39 pm on Oct 20, 2009 (gmt 0)

Having been through it I will echo bwnbwn - Don't volunteer anything! Keep your responses short and to the point. If you start mentioning affiliate accounts or Adsense accounts you can be certain that you're going to have to produce them. Just keep all your 1099's together and don't open any unneeded doors.

Most important... do not lie.


 2:47 pm on Oct 20, 2009 (gmt 0)

Thanks. But what if they ask me what exactly I do to earn my income? If for example I tell them that I display ads for Google maybe they want to see some of my websites. In other words, one answer may lead to a new question.

Fortune Hunter

 2:53 pm on Oct 20, 2009 (gmt 0)

Don't volunteer anything! Keep your responses short and to the point.

I completely agree. I have thankfully never had to do one of these, but my accountant has done several. He explained that you want to let the IRS agent lead the interview. Don't bring all of your papers, don't volunteer anything. Simply answer the questions they ask truthfully and concisely. Don't ramble on or offer up additional details. If they want more details they will ask.

Here is a mistake I have heard friends of mine make. Don't take all of your records for one year or several years and let the agent start a free hunting expedition. You need to remain in control of everything the entire time. If you offer up additional records or details you can bet they will take you up on the offer and dig and dig and may find things they weren't even looking for.

Most important... do not lie.

Also excellent advice. Remember if you get caught in a lie you could quickly cause the audit to escalate and may even cause it to switch into the criminal realm instead of the simple fine, penalty and pay extra tax realm.

Fortune Hunter

 2:57 pm on Oct 20, 2009 (gmt 0)

But what if they ask me what exactly I do to earn my income?

My guess is they won't ask such a vague question. They might and if they do answer it is quickly, truthfully, and most importantly concisely as you can. From what I have read and heard from others that go through this is the agent usually has very specific questions about very specific items on your tax return. Again, let them lead and tell you what they want.


 2:59 pm on Oct 20, 2009 (gmt 0)

The IRS is only intrested in one thing income verses what you claimed as income.
One question may lead to more is correct that is why if they ask you what you do for a living answer Internet Advertising.
They already know you have adsense and get deposits from Google. They are coming in to verify your deductions and income.

Keep the answeres from being specific that will lead to more questions. Play dumb disclose only what you disclosed on the return. If they open a can or worms then tell them you will need to look into it and will get back to them on it.

Less is better.


 3:02 pm on Oct 20, 2009 (gmt 0)

Have the audit conducted at your accountant's office. Have been through several and found it is a buffer that keeps them from a "let's look at that paper work" fishing trip.

You didn't say if it is a IRS or state audit. Major difference.


 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.


 4:09 pm on Oct 20, 2009 (gmt 0)

If you did everything lawfully, you might even find you have a refund due for things you could have deducted but didn't know you could. I've seen that few times.


 4:20 pm on Oct 20, 2009 (gmt 0)


Oh yeah, forgot about that. So far, we've revised the return twice from the audit. Each time, we found additional deductions.

We fell like telling the auditor to just quit now instead of losing the government even more money. :)

Fortune Hunter

 5:00 pm on Oct 21, 2009 (gmt 0)

We fell like telling the auditor to just quit now instead of losing the government even more money. :)

Hah! Asia that is great!


 1:15 pm on Oct 22, 2009 (gmt 0)

vivalasvegas let us know how you do.

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