Audit Representation for Small Business


Mega CPA Firm Experience – Small Firm Service

Nick Meester is our lead CPA, and principal of Nuance Financial Tax & Accounting.  He spent 6 years working at a “Big 10” accounting firm in the Minneapolis Minnesota offices.  There, He got to serve clients facing IRS problems of every flavor & size.  Nick started Nuance Financial tax & accounting in-part because He saw an opportunity to use the tremendous experiences He had downtown to help small business owners.

Nick Meester CPA Provides Audit Representation Services for Small Businesses
If you’ve just received a notice that you’re going to be audited by the IRS, it’s definitely cause for concern but it doesn’t mean you should panic.  In fact, there are a number of reasons that tax returns get audited: Your number might have simply been pulled, your industry could have been focused on for a compliance study, or you might have had an old employee or competitor “tattle” on you just to give you headaches.  Regardless of the reason, the auditor should be able to let you know what it was that initiated the audit –  if you ask them.

While getting audited doesn’t necessarily mean that you’ve done anything wrong (your going to need to validate everything you’ve been reporting), there are certainly some things that cause the IRS computers to tag you more frequently.

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Things that might Flag an IRS Audit:

  •  High Automobile expenses
  • Very low gross profit margins
  • High business use of automobiles
  • High travel and entertainment deductions
  • The business shows little or no profits
  • Taking all distributions rather than a salary in an S-Corp
  • Relationships to other taxpayers being audited – is your business partner or spouse getting audited?
  • IRS project correlation – they are focusing on folks like you

Make sure that you inquire about why you’re being audited because it’s your prerogative
to ask. You should also know that there are four kinds of IRS audits that you could potentially see.

There are Four Kinds of IRS Audits:

  • Correspondence Audit
  • Office Audit
  • Field Audit
  • Random or TCMP audit – Taxpayer Compliance Measurement Program audit

Correspondence Audits:

This is the least severe type of audit, broadly speaking. Sole Proprietors are usually the victim on this type of audit, where the IRS service center sends a letter requesting some validation or verification of certain deductions on your tax return. They will often want to see cancelled checks or some specific receipts or validation of charitable donations. If you do not have the documents which they are asking for, it’s probably a good idea to get representation (like we offer here at Nuance Financial Tax & Accounting from a CPA like Nick Meester). If you do have the items they have requested, it’s generally not an issue.

The key in all these audits is whether or not your tax return is legitimate and you have the data to back up the claims you made on the tax return. If you do not have the documentation to prove your claims on your tax return, then it’s even more important to get representation because you will be facing fines and penalties on top of the possibility of reclassification of income and additional taxes.

If you’re small, and not showing that much income, the entire correspondence audit is performed through the mail.

Office Audit:

When the IRS has more substantial questions or concerns, you will receive an invitation for an IRS office audit where you will meet on their turf. This is often an escalation from a correspondence audit. The office audit will usually be wrapped up in one day, and if they need additional records you’ll have time to supply them with any missing information.

Field Audit:

The field audit is the most serious type of audit that you can face – where the IRS will be paying you a nice little visit to your office, home, or location. During the Field Audit, the IRS agent will be working much more intimately and you should most definitely have representation.

The IRS agent will call you on the phone to do the following:

  • Schedule an Interview the principals
  • Arrange a date to come to your place of business
  • Determine where your records are located
  • Provide a list of the records which they will need made available.

The biggest reason that a field audit is the most menacing of the audits is because the IRS agent is doing what many of in the industry call “going on a fishing expedition”. The idea is that they are going to come to your place of work and probe you to see if the audit shows merited problems. They are basically shaking you down a bit, looking for issues.

Your representative will try to serve as a buffer between you and the IRS auditor so they can help and even try to get the audit to be conducted in the office of the representative rather then your own business.

Your Professional Representative’s Role:

The primary goal of your representative is to handle the audit in such a manner as to mitigate your “exposure”. Because tax law is subject to interpretation, there’s no such thing as a “perfect” tax return; which means that scrutiny by an interpretive person opens you up to risk. Each IRS agent may have nuances in their definition of words & law, which means that the goal is get them in, satisfy their inquiry, and get them out without giving them any reason to expand the audit.
Every effort should be made by you and your representative to answer all of their questions, supply the proper documentation, all in a prompt manner. This communicates that there is nothing to hide, and the auditors will tend to continue on more easily.

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How to be Audit Ready:

1 – Be Legitimate – Pay Your Fair Share & Not a Penny More.

We recommend working with a professional (like us) with your tax return. Unfortunately, our tax laws and systems are quite complex. Because of this complexity, it’s best to have a “guide” to go “fishing” with when it comes to finding tax savings.

Being audited means that you are kind of “on trial” to prove that you’ve filed a legitimate, bona-fide, tax return. The key to this is to operate with integrity and within the law in the first place. But trying to play by the rules doesn’t mean you don’t aggressively implement & utilize strategies to mitigate your tax burden. On the contrary, we think you should work to pay your fair share in taxes and not a penny more.

Ignorance & Inexperience are killers of your efforts to mitigate your taxes while operating legitimately, which is why working with a tax planning firm with extensive experience in audits, tax law, and bookkeeping is helpful – Nuance Financial specializes in this.

What we do is create a pro-active, shrewd tax plan to help you mitigate your taxes within the complex tax law. We’re intimate with the nuances of the tax law and we delight in helping every-day business owners & 1099 income earners navigate these bureaucracy-laden waters.

2 – Have Professional Documentation & Accounting.

Being organized with your record keeping will allow you to ensure a higher degree of compliance and also satisfy audit inquiries faster. When you are able to quickly produce professional reports and records in the event of an inquiry, you communicate that you are organized, professional, compliant, and bona-fide in what you do.

Sound bookkeeping is the foundation of a healthy business. Having bookkeeping done to a professional standard will allow you to manage your business better, direct investment, and combat IRS audits swiftly.

Nuance Financials Solution.

When it comes to IRS audits, we love to help represent you to the IRS and also work to ensure you have professional records & legitimate tax returns. The idea is that we want to help you reduce the risks within your business of IRS audits, and help you pay your fair share and not a penny more.

If you are facing an IRS audit, please contact us immediately for experienced, down-to-earth CPA representation from our lead accountant – Nick Meester.

TCMP Taxpayer Compliance Measurement Program Audit

The primary goal of these audits are to update the information that the IRS computers use to score tax returns. This is an incredibly time consuming audit for the business owner because it is a full, “regular” audit.

In this audit, they are going to validate and ask for checks, invoices, contracts, bank statements, and other items they deem necessary for their audit. On top of that, every line of your tax return is going to be audited, which means you need to be able to substantiate every claim on the return rather than a selected few.

You can choose to face the audit yourself, have a representative accompany you, or have a representative go in your stead. If you are the one facing the auditor, you’re risk of getting question and drilled increases dramatically and you might end up answering questions in a manner that is not beneficial. Remember, there is no such thing as an idle conversation with a person from the IRS – and they are really good at uncovering things or identifying the suspicious “breadcrumbs” that triggers an expansion of the audit.

If you find yourself handling any communication with an auditor, here are some of our top-level recommendations:

  • Be organized
  • Give them only the documents needed to support the deduction being questioned
  • Never give the IRS agent more or less information than what is being requested
  • Answer questions honestly, but briefly and concisely.
  • Never give the IRS the only copy of a document
  • Do not leave your original records with the IRS
  • Don’t chat or have casual conversation – remember that they are really good at this and every comment you make is “on the record”.
  • Stay calm, don’t argue or be belligerent.
  • Insist on getting copies of information in their files or copies of anything that you sign. You should ask to get their work.
  • DON’T SIGN ANYTHING until a representative can review it!