February 2012 - How to be "audit ready"

No one likes to see a policeman's flashing lights in the rearview mirror, and no one likes to receive a phone call or letter from the dreaded auditor. But if you operate a business or your organization receives federal or state grants, at some point you may find auditors making that contact. And while it's true that only a small percentage of individual taxpayers suffer through an IRS audit in any given year, it makes sense to be prepared—just in case. One key to being ready is knowing how auditors think.

• Why can't they just take my word for it? Auditors are trained to be skeptical. In fact, they're required by professional standards to maintain questioning minds while performing their duties. They don't necessarily assume that you're dishonest, but they won't put much stock in your honest face and sparkling personality either. If you claim a deduction for charitable contributions, for example, an auditor doesn't really care whether or not you're a generous person. He or she will want to see proof that you actually donated the amount of money that's listed on your tax return. If your business says it incurred certain expenses while entertaining clients, the auditor may need to examine actual restaurant receipts. To an experienced auditor, skepticism is second nature. Don't take it personally.

• Show me the documents. Auditors love documentation. It makes their job easier. When you can put your hands on an invoice that exactly matches the amount claimed on your federal form, you may actually bring a smile to an auditor's face. On the other hand, if he or she asks for supporting documents and you hem and haw and search for hours, be prepared for trouble. They're not mad at you. They just have a job to do, and the burden of proof is on you. The best way to prepare for an audit is to maintain good records throughout the year. Stay organized. Know how to find your documents and be ready to support every number claimed.

Having good records and thinking like an auditor can make actually going through an audit much easier. If you need assistance at any point, contact our office.