48.4 Preparing for the Audit

After an office audit is scheduled, the first thing to do is look over your return. Refresh your memory. Examine the items the IRS questioned in its notice of audit, and organize your records accordingly. Also check the rest of your return and gather proof for items you are unsure of. At this point, you should take a broad view of your return to anticipate problems you may encounter. Before the actual examination begins, consider possible settlement terms. Assume that the agent will assess additional tax, but establish the range you will consider reasonable. You can always change your mind, but giving some thought beforehand to possible settlement terms will help you later when settlements are actually discussed.

You may authorize an attorney, CPA, enrolled agent, or other individual recognized to practice before the IRS to represent you at the examination without your being there. To do so, give your representative authorization on Form 2848. An attorney or other representative authorized on Form 2848 can perform any acts that you could, including entering into a binding settlement agreement.

Planning Reminder

Audit Scheduling

Make sure that the examination is scheduled far enough in advance for you to get ready. Do not let the IRS hurry you into an examination until you are prepared. In some localities, particularly rural areas, the IRS may give short notice in scheduling a field audit. An agent may even appear at your place of business and try to begin the audit immediately. Resist this pressure and reschedule the meeting at your convenience.

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If you attend the audit, take only the records related to the items questioned in the IRS notice. Do not volunteer extra records; if the agent sees them, it might suggest new areas for investigation.

If you are concerned that there may be a problem of fraud, see a qualified attorney before you come into contact with an IRS official. The attorney can put your actions in perspective and help protect your legal rights. Besides, what you tell an attorney is privileged information; he or she cannot divulge or be forced to divulge data you have provided, other than data used to prepare your tax return.

A field audit of your business return is likely to involve a comprehensive examination and requires careful preparation. Together with your tax adviser, go over your return for potential areas of weakness. For example, the agent is likely to question deductions you have claimed for business travel. If you are an incorporated professional, the corporation’s deductions for expenses of company-owned cars or planes will probably be reviewed. The agent may suspect that a portion of these business deductions are actually nondeductible personal travel costs; be prepared to substantiate the business portion of your total mileage and operating expenses.

The IRS is generally required to hold an office audit at the office located nearest to your home. The IRS generally may not conduct a field audit at the site of a small business if the audit would essentially require the shutting down of the business, unless a direct visit is necessary to determine inventory or verify assets.