The IRS is playing catch up, big time, right now. They had months of just trying to get the economic stimulus checks out which tax returns and correspondence piled up. When they got back to work, formally, on 7/15/2020, they decided to prioritize their audits to just a handful of key areas.
That’s good news for most of us, at least as it applies to IRS audits.
But there is someone else that is growing their audit forces and they’re looking for you. Your home state. Your neighboring state. Heck, maybe even states that have nothing to do with you and you’ve never even visited them.
Adding to the confusion, you could be audited by a licensing department, the sales tax department, the state income tax department or various other governmental departments. And they almost always report to each other.
That means you need to be careful if you get a call. You could end up with a handful of departments after you, if you’re not careful.
If you get a notice, there are three things to make sure you do:
1.Don’t volunteer anything.
Don’t lie. But don’t expand. Short and simple answers. If you don’t know, say that. “I don’t know” or “I don’t remember” can save a lot of headaches down the road.
2.Delay until you have a strategy.
If you get a letter and are asked to call, talk to your CPA first. Figure out what they auditor is after and then strategize how best to answer. You may want to have your CPA call instead of you. Don’t ignore the letter but don’t jump the gun in getting back to the agency.
3.Collect information from the auditor first.
This is where you may need an experienced tax representative. The auditor will try to get information from you. You should get information from them. What triggered the audit? What is the scope (what years, what businesses) of the audit? Is it a joint agency audit? For example, sometimes state income tax and state sales tax audits occur concurrently. That’s good to know when you’re pulling files for their review.
The number of state audits is going up. The IRS is no longer (at least for now) the biggest issue for companies. States are.
Make sure you know where you have nexus and may need to file state income tax forms. Collect and pay sales tax as required. (Which may be pretty much every state that has sales tax now) And make sure your business has business licenses as required.
It’s trickier these days. It’s all about strategy if you want to get ahead.