Five Questions Entrepreneurs Should Ask Their CPA to Reduce Audit Risk
Nothing elicits more fear than the thought of a government audit. Entrepreneurs looking to reduce their risk of audit should speak with a qualified CPA at the start of next year. In addition to a thorough review of tax strategy and required tax documentation, an experienced CPA also helps entrepreneurs understand and mitigate their risk of audit.
When choosing a CPA to work with, it’s important to look for a professional tax preparer with experience working with entrepreneurs and their specific industries. Asking key questions can ensure a good fit and provide peace of mind.
Is the CPA Comfortable and Willing to Work With the IRS?
Many tax preparers suggest entrepreneurs skip legitimate deductions because they don’t want to raise any red flags and risk an audit. Or they may suggest additional deductions that are not legitimate. Either way can end up costing you more in the long run. As long as you’re honest and have legitimate and reasonable business deductions there is no reason to skip deductions.
If you meet with a tax preparer that suggests you should avoid a deduction over fears of an audit, it’s probably best to work with someone else. The tax preparer you choose should be comfortable and willing to handle an audit if necessary.
Who Will Handle IRS Communications?
When choosing a tax advisor, look for an experienced CPA that can handle all IRS communications. U.S. citizens can use Form 2848 to give their tax advisor power of attorney during an audit. Filling out this form is a good idea, as most entrepreneurs don’t have the same knowledge or expertise about taxes as their auditor or CPA.
Has the CPA Ever Handled an IRS Audit for a Client?
The first CPA exam was administered in NY in 1896 and a lot has changed since then. CPAs can’t provide much help during an audit if they’ve never handled one before and aren’t up to date on latest laws and regulations. When meeting with your CPA, make sure to ask about their prior experience working with the IRS on audits for their clients. Without providing names, the CPA should be able to give you a few examples and the results of those audits.
How Will the CPA Build a Relationship with the IRS Auditor?
IRS auditors have extremely difficult jobs. Selecting a CPA that takes the time to build a relationship with the auditor can go a long way towards a successful audit. The CPA should aim to make the auditor feel comfortable and assist them in any way possible.
What Documentation Will You Need to Reduce Audit Risk?
Most entrepreneurs know that they need to keep documentation of all deductible expenses for at least seven years. This documentation would need to be presented during an audit . It’s also important that your tax preparer keeps copies of your tax returns, W2s, 1099s, general ledger, balance sheet, and income statement for your business.
Although no one likes the idea of an IRS audit, finding a competent CPA that handles all IRS communications, keeps excellent documentation of all records, and understands how to properly prepare your tax returns can reduce audit risk and provide peace of mind. If you are contacted by the IRS that they have pulled your file for audit, always contact your tax advisor for help. The CPA works closely with the IRS to assure that your file has been handled professionally and can answer questions the IRS auditor may have. TMDL offers financial consulting services, tax preparation, and IRS representation.
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