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What role do organized tax records play in audit prevention?

When it comes to the Internal Revenue Service, is no news the same as good news? If the topic is audits, the answer might possibly be yes. Now that another April 15 has come and gone, many individuals may be releasing a sigh of relief from hearing no news from the IRS. 

For business owners who file quarterly returns, however, that relief may be more short-lived than for annual tax return filers. In addition to an annual return, businesses that pay employees have additional paperwork to file. Specifically, payroll tax withholdings from employees’ paychecks are reported on quarterly federal payroll tax returns.

Are there proactive steps that a business can take to prepare for the possibility of an audit? Our Washington, D.C. and Montgomery County-based tax law office would answer that question in the affirmative. As a preliminary matter, contacting an attorney after being audited can create a buffer, as IRS personnel will be obligated to communicate through the lawyer. In fact, a taxpayer or tax entity that is represented by counsel may not even need to be present during the audit appointment.

An audit may require a taxpayer to reconstruct expenses and justify entries on a tax return. In that regard, keeping good business records can make everyone’s lives easier. We recommend that a taxpayer keep tax returns and records for at least the past three years. With technology like digital filing and document scanning, records can be easily organized.

Yet a proactive approach to tax audits or disputes requires more than just recordkeeping. Purchases should be categorized as they are incurred. The basis of property and other taxable investments should be tracked from the outset. Qualifying deductibles should also be recorded as they surface. Our attorneys can help with these and other audit prevention tips. 

Source: Internal Revenue Service, “IRS Audit FAQs,” copyright 2015, IRS 

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