Nobody wants to face an IRS audit. But the prospect of an audit is a reality when owning a business. I always advise clients to first, do not panic if you receive a notice of audit. Second, start compiling all the necessary records to prepare. You will likely need financial statements to prepare your audit response, and it’s best to gather those as soon as possible. Here are the records and documents I generally suggest you have ready for an IRS audit.
Receipts — Make sure you have copies of all possible receipts for the audit year in questions. This means anything that you claimed as an expense or business deduction should have a hard copy receipt. Organize receipts by date and with notes of how they pertain to your business. Receipts also include recurring bills, such as Internet and telephone service.
Canceled checks — Gather all canceled checks you have for business expenses and group these with copies of the bills they paid. If the check was for a reimbursement, include a copy of that receipt with the canceled check.
Previous tax returns — The IRS may only be auditing you for one tax year, but it’s best to have copies of your previous tax returns. This is helpful to demonstrate your history of reporting income and expenses and filing on time without questions of audit.
W-2 and 1099 Forms — If you are a business with employees, be sure to have copies of all your employee W-2 Forms and 1099 Forms for all your independent contractors. You should also have any payroll documentation and pay stubs for employees and yourself as the business owner.
Legal papers — Gather any legal papers or documents that may pertain to your business or audit. Be sure to include a description of what the case was about, when it happened and how it relates to your business, credit or deduction. Examples may include property acquisition or tax preparation or advice.
Loan agreements — These are also important to have for your audit. Include a copy of the original loan agreement with the following information: names of the borrowers, location of the property (if applicable), financial institution making the loan, amount borrowed, terms, and a settlement sheet.
Schedule K-1 — This is important to have if you are an S corporation. A Schedule K-1 is used to report each shareholder’s share of income, losses, deductions and credits when an S corporation files its annual tax return.
Your IRS notice of audit will instruct you on how and when to present your documents in an audit. Never mail or give the IRS original records. Always make copies!
Do not panic if you’re faced with an IRS audit. While it can be stressful, an experienced Orange County tax attorney or tax professional will help you with your documents and remedy the situation so that you, the taxpayer or business owner, is protected and receives the best possible outcome.
Allison Soares is a partner and tax attorney at Vanst Law LLP. It doesn’t matter the issue: audits, collections, appeals, international disclosures, grumpy people— Allison enjoys fixing problems. In addition to her legal work, she has worked in accounting and utilizes that knowledge to her advantage while handling cases involving EDD audits from San Francisco to San Diego.
