Follow the Money©
I am going to share something with you all today. I am a former government auditor. Although it has been years since I went through an organization’s books, I thought you might benefit if I shared a few helpful tips for those of you facing an audit.
1. There are two main types of audits.
a. A correspondence audit, in which questions and answers are exchanged in writing. These are fairly straightforward and if you can satisfy the auditors’ questions, these audits can be resolved quickly.
b. A field audit occurs when the auditors come to your home or place of business. If possible, avoid a field audit. Go to the auditor’s office. A field audit is typically more serious and you would benefit from having a tax professional present to represent you. Years ago, during a field audit, I can recall checking a corporation’s physical assets. Among them were listed three fork lift trucks. I asked if I might see them and was taken to a warehouse where I saw five fork lift trucks. I asked about the additional two fork lifts and the business owner proudly told me that he purchased the three at a great price during an auction and after the sale, when he went to the loading dock to pick them up, he found the other two and so took all five. (The audit did not go very well.)
2. If you are missing receipts or other documents, you are allowed to reconstruct documents. A common example of this might be a log of business mileage traveled. Use your day planner or calendar to reconstruct your travel by car. This is acceptable.
3. The auditors will need to be convinced that you reported all of your income and that your deductions and credits were allowable. If the audit is not going well, demand a recess to consult a tax professional. You may also ask to speak to the auditor’s manager if you feel you are not being treated fairly.
4. The most important thing I want to share with you is do not joke or answer unless asked. Later in my career, I worked for an organization which performed contract work for the government. On one particular audit, the auditors were posing questions about effort (the amount of time devoted to their contract). They asked the principal researcher about his work on the project and asked: “How much time do you devote each week to this project?” The researcher responded: “Oh, about 120 hours.” The auditors responded, “Why then, do you only have 30% effort assigned to this contract?” Without missing a beat, the researcher, said, “Wait, I must have misspoke”, and he reached into his pocket pulled out a calculator, punched in some numbers and said: “12 hours not 120.” The auditors left satisfied.
Audits can be scary things. Keep good records, seek professional advice and be truthful. It will serve you very well.
Please do contact me if you have any questions.
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