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Preparing for an IRS audit and legal resources for small businesses

This presentation offers educational insight on small business audits, recordkeeping, and IRS audit procedures. Learn about auditor responsibilities, required documents, extension options, duration, review processes, appointment details, dispute resolutions, and taxpayer rights. Discover how to prepare for an audit, understand the audit process, and seek representation from attorneys, CPAs, or enrolled agents. Benefit from resources such as the Taxpayer Advocate Service and legal advice for managing IRS audits effectively.

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Preparing for an IRS audit and legal resources for small businesses

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  1. Preparing for an IRS audit and legal resources for small businesses Luz MartinezStaff Attorney

  2. Disclaimer This presentation is for educational and informational purposes only and not does not constitute legal advice. It is recommended that you seek advice from an attorney or CPA for your specific matters.

  3. Agenda • Small business audit • Recordkeeping • Resources

  4. IRS Audit • An IRS audit is a review of an organization’s accounts and individual financial information • Audits ensure taxpayers are complying with the tax laws and reporting substantially correct amount of tax

  5. Notification from the IRS • The IRS notifies taxpayers of an audit by mail • The IRS will not initiate an audit by • Telephone • Email

  6. Auditor’s responsibility • Your auditor should request only information pertinent to determine the correct reporting on the tax return • Your auditor should provide you information about what is needed • Your auditor should provide you with information about any adjustments being proposed • Your auditor should provide you with the progress of the audit

  7. What will I need to provide? • The IRS will provide you with a written request for a specific of documents • Contact your auditor to find out what kind of documents they will accept • The IRS accepts some electronic records produced by tax software • Keep records for at least 3 years from the date the tax return was filed

  8. Record Request • The auditor will provide forms with lists of specific documents you will need to provide • Form 886-A, Explanation of Items • Form 4564, Information Document Request, • If you have any questions abut what is being requested, you should contact your auditor

  9. What if I need more time? • Audit by mail • Fax your written request to the number on your IRS letter • Mail your request to the address on your IRS letter • Usually a one-time automatic 30 day extension is granted • In-person audit • Contact the auditor

  10. What will be reviewed? • The IRS can audit tax returns filed within the last 3 years • The IRS looks at the returns for the years before and after the audit to see if the same items repeat • If the items repeat, the IRS may expand the audit to include the other years as well

  11. Duration of an audit • Correspondence • Can take up to 2-4 months • IRS Office • Initial appointment will be 2-4 hours • Additional appointments may be necessary • Place of Business • Initial appointment could be one or more days • Additional appointments may be necessary

  12. An audit at your business • Auditors often conduct the audit at your business location due to the complexity of the case, the volume of information, and to allow the auditor to tour your business to understand how it operates

  13. What happens at the appointment? • An interview so the auditor can understand your business, how transactions are recorded, and records are maintained • A tour of the business to see how the business operates • A review of the information requested on the Form 4564, Information Document Request • A status update at the end of the scheduled appointment • The auditor will discuss a Mutual Commitment Date with you. This date is when your auditor expects to be able to issue a report of proposed changes or make a no-change determination

  14. What happens if you disagree with the audit results? • You may request a conference with the auditor’s manager • You may ask for Fast Track Mediation • Involves an appeals officer trained in mediation, the taxpayer, and the auditor and the auditor’s manager • You may request that the case be sent to the Office of Appeals • Before requesting a conference with an appeal officer, you should have provided the information requested by the auditor

  15. Taxpayer rights during an audit • Privacy and Confidentiality • IRS will not disclose the information you provide except as authorized by law • Professional and Courteous Service • Representation • Payment of only the correct amount of tax • Office of Appeals and Judicial Review • If you disagree about the amount of tax liability, you have eth right to ask the Office of Appeals to review your case

  16. How does the IRS conclude an audit? • No-change • Agreed • IRS proposed changes and the taxpayer understands and agrees to the changes • Disagree • IRS proposed changes and the taxpayer understands but disagrees with the changes

  17. Who can represent taxpayers in an audit • Attorney • Certified Public Accountant • Enrolled Agent • Unrestricted as to which taxpayers they can represent, what types of tax matters they can handle, and which IRS offices they can practice before • Unenrolled preparer • Limited to the examination with respect to the return he or she prepared • Cannot practice before appeals officers, revenue officers, and counsel

  18. Help Available • Taxpayer Advocate Service – Issues with the IRS

  19. Recordkeeping • Good records will help you monitor the progress of your business • Records can help you • prepare your financial statements • identify sources of income • keep track of deductible expenses • support items reported on your tax returns.

  20. What kinds of records should I keep? • Gross receipts – income you receive from your business • Invoices, Forms 1099-MISC, receipt books • Purchases – items you buy and resell to customers • Credit card receipts, invoices • Expenses – costs you incur to carry out your business • Credit card receipts, invoices, canceled check • Assets – property that you own and use in your business • Purchase price, cost of improvements, how you use the asset

  21. How long should I keep records? • If you file a tax return, keep records for 3 years • Keep records indefinitely if you do not file a return • Keep employment tax records for at least 4 years after the date that the tax becomes due or is paid, whichever is later

  22. How should I record my business transactions? • Business transactions are ordinarily summarized in books called journals and ledgers • You can use a journal, ledger, or electronic records

  23. IRS provides small business workshops • The purpose of the workshop is to help small business owners learn what tax forms are required when completing tax returns for a small business • The City of Houston Multi Service Center and the IRS sponsor a small business tax workshop every third Wednesday • Third Ward Multi Service Center, 3611 Ennis Street, Houston, TX 77004 • For more information contact Roy Villarreal; Phone: 832-393-4051; Email: Roy.Villarreal@houstontx.gov

  24. Questions www.makejusticehappen.org

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