What an audit means for your business, and how to handle it

The word "audit" puts many business owners on edge, but auditor David Seabaugh of Baer & Edington LLC in Jackson says there's no need to panic if you get a notice. It doesn't automatically mean something is wrong, he says, and audits are actually becoming more frequent and common.

"The IRS has hired additional individuals just to go out and perform these audits," says Seabaugh. "State, federal and local governments are all feeling the squeeze of reduced incomes, so possibly doing audits is an effort to double-check returns to make sure of any additional taxes that may be due."

According to Michael Devine, IRS spokesman for Missouri and Kansas, each tax return goes through a computerized screening, and most are accepted just as they're filed.

"If there are discrepancies, you may receive correspondence from the IRS asking you to verify, correct or explain information on your return," says Devine.

The discrepancy may be a lack of information from the taxpayer -- if you had multiple jobs throughout the year and forgot to bring a W-2 or 1099 when you had your taxes prepared, for example. Mathematical errors and too many round numbers, which look like estimates, may also trigger an audit.

"Returns should be prepared with actual information," says Seabaugh. "Other instances are significant changes from one year to the next. It may not mean anything is inaccurate or incorrect, but it raises a red flag."

Sometimes businesses or individuals are chosen for an audit simply by random selection or if someone you did business with was selected for an audit, according to www.irs.gov.

If you or your business does get an audit notice, Seabaugh advises contacting your tax preparer, who specializes in this area and will work directly with the IRS agent in gathering and providing records.

"We work as a go-between between the agent and the taxpayer," says Seabaugh. That way, he explains, you'll have professional consultation and will not be interrupted from your daily business.

Audits may take place via mail correspondence, in an IRS office, your accountant's office, or at your home or place of business. Once the audit is completed, it could result in no changes, an amount due or a refund.

There's not much you can do to prevent an audit, says Seabaugh, except be honest when preparing your return and keep all the documentation you used.

According to the IRS, records relating to an asset should be kept for as long as you have the asset plus three years. Payroll records should be kept for six years. The IRS can include returns filed within the past three years in an audit, though additional years can be added if necessary. The IRS will not usually go back more than six years, and most audits will be of returns filed within the past two years.

"Your best defense against an audit is to be prepared for one with good records," stresses Devine. "They will provide the data you need to prepare your return, and serve as substantiation for your return should you be audited."