4 Steps to Enduring an Audit

Audit notices can come as a shock. Taxes are bad enough for middle market companies, and now this. Nothing can ruin your day like receiving that dreaded letter, then facing a none-too-friendly visit from an auditor who'll ask questions about your business that you may or may not be able to answer immediately. As in all things, there's a right way and a wrong way to approach being audited. Here are four recommendations:

A businessperson takes notes and reviews a stack of documents in a folder.

1. "Keep Calm and Carry On"

Yes, it's OK to wallow in self-pity for an hour or two, and maybe even start ranting about the IRS, the U.S. president and your tax advisers. However, don't get lost in this. You have a lot of work ahead if you want to survive a tax audit with your dignity and finances intact. If you help lead a middle market business, that work must remain your primary focus, and being continually aggrieved at the tax authorities won't help you grow your company's revenues. So wallow for a bit, snap out of it and then continue to perform your regular functions. Just add one more responsibility: responding to the auditor.

2. Involve Professional Help

You don't want to face the tax authorities by yourself. Immediately bring in a professional, such as a tax attorney or specialist, who understands how the auditing process works. Have that person represent you. Yes, it may be expensive, but so will be the mistakes you make from not understanding the process, not to mention all the valuable time you'll lose because you're distracted from your normal tasks.

Sit down with your tax professional and pore over all your recent returns, looking for potential problems. The issues you uncover undoubtedly will be the auditor's focus. For many businesses, including middle market firms, red flags for the tax authorities include big yearly changes in expenses or deductions. Auditors generally look for anything abnormal between your most recent filing and previous ones. They also base the norm off of filings for other companies within your industry.

3. Organize Your Records — and Your Time

You must support your assertions using documented proof, so having a good record-keeping system will be a big help. If you don't have complete records, then go back and try to document as much as you can, especially questionable expenses or deductions. This may take more time than you think; banks and other financial institutions usually don't make it easy to access records from previous years, so you may need to submit special requests. Organize your documents and have them ready for when the auditor visits, and also make sure you allocate sufficient time for review meetings: A good rule of thumb is six hours per auditing appointment.

4. Be Professional With the Auditor

Don't volunteer more information than the auditor asks for, whether you're answering questions or responding to document requests. Provide what they want and no more. Make sure only a few designated people within your middle market company are allowed to speak to the auditor. You'll want to control communication as much as possible, and keep it professional. You have every right to, and should, ask the auditor where you are in the process and what the next steps will be. They will generally provide you with such answers, which should help reduce your anxiety.

The takeaway is to stay calm, get professional help, carefully organize your documentation and act professionally throughout the audit. By following these basic rules, your middle market company can endure the arduous process.

Has your company ever been audited? How did you fare? How do you wish you approached the process differently? Tell us by commenting below.

Boston-based Chuck Leddy is an NCMM contributor and a freelance reporter who contributes regularly to The Boston Globe and Harvard Gazette. He also trains Fortune 500 executives in business-communication skills as an instructor for EF Education. Circle him on Google+ and visit his website.


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