The best way to deal with an IRS audit of your small business is to know what to do and not to do. Consider the following:
Be professional
Do: Auditors have a job to do, and it’s in your best interest to show them respect. If you’re called to their office, do show up on time, dress appropriately and have requested documents in hand. If auditors visit your place of business, encourage staff to answer questions honestly and completely. Within reason, it’s acceptable to ask for more time to locate a particular record. If you can’t find supporting documentation, say so.
Don’t: Avoid arguing with the auditor. Ask for clarification if needed, but don’t question every document request. If you disagree with the auditor, state your case and understand you have appeal rights should the disagreement become costly.
Be organized
Do: If you keep business records on a computer, know how to create and print easy-to-follow reports. Prepare for the audit by laying out checks, invoices and other records in a logical fashion.
Don’t: Dump a box of receipts into an auditor’s lap. The easier it is for an auditor to find what they need, the shorter the time period required to complete the audit. Remember, the longer an auditor spends with your records, the more likely he or she will find something amiss. Also keep in mind that it’s rarely a good idea to create records during an audit. Exceptions may be if you’re honestly trying to reconstruct transactions from memory or your records don’t exist (for example, after a natural disaster or a fire).
Be honest
Do: Make a straightforward effort to justify deductions. If you can’t locate a specific record, look for alternative ways to support your tax return. For example, if you’re claiming a deduction for depreciation but can’t locate the paperwork, redo the calculation for the auditor. A vendor, landlord or mortgage company may have copies of pertinent records if yours have gone missing.
Don’t: Never create numbers that can’t be corroborated or reasonably explained.
Ask for help
Do: Get an expert in your corner if you're facing an audit.
Don't: Ignore your need for help. Remember, auditors conduct audits all the time. This is a rare event for you. Too many businesses provide more information than is needed, opening themselves up to a higher tax bill. Make sure this is not you!