Few things are as nerve-wracking as receiving a letter from the Internal Revenue Service informing you that you or your business is the subject of a tax investigation. Some investigations are the result of information uncovered during an IRS audit, while others may be triggered by a tip-off from employees, business associates, or other third parties. Even social media platforms can be a potential source of evidence when initiating a tax investigation.
Whatever the source of the suspicion, you need to be prepared to defend yourself and your business. Here’s what you need to do if you’re facing an investigation.
The first thing you need to do is stay calm. You may feel you have nothing to hide and want to clear up any matters as quickly as you can, but as with any investigation anything you say now could come back to haunt you later on. Be careful what you say to employees, business associates, and friends and family as they could be interviewed as part of the investigation process.
Seek professional advice
Next you’ll want to seek out advice on what to do from professionals. Your current accountant may be well-versed in tax matters and understands the investigations process, or you may need to contact a specialist tax advisor. They will be able to review your accounting and tax records, identify areas that could be a cause for concern, and advise you on how to proceed to resolve issues and minimize penalties.
Cooperate with the investigators
If you don’t feel comfortable speaking to or meeting with the investigators directly, appoint a tax accountant or attorney to act on your behalf and provide you with professional assistance. During the initial stages of the investigation, the IRS will likely request more information from you. Your adviser will determine what constitutes as a “reasonable request” and help you respond in a timely manner.
Make a full disclosure
If you know there are errors on your tax return, make a voluntary disclosure at the earliest opportunity. In some cases, taxpayers who make a full disclosure about their underpayment of tax may be able to avoid criminal charges in favor of a civil audit.
Don’t do it again
If you have made an error that leads to an IRS investigation, make sure you don’t do it again. The IRS does not look favorably on repeat offenders, so take extra care when completing future returns and make sure they’re submitted on time. If you’re not confident in your ability to file accurate returns, look into hiring and working alongside a tax professional.
Mike Smith is a senior director of companydebt.com and an insolvency expert for the past four decades.