Playing by the Rules: 4 Steps to Follow When You are Asked Some Taxing Questions
It is always a worrying time when you are told that your tax affairs are being investigated, even when you are sure that you have done everything by the book, but how you respond to these questions will have a big influence on the eventual outcome.
One sensible strategy would be to appoint skilled tax attorneys who have been around for many years as they will be able to guide you through the investigation process and tell you what to expect.
Here is a look at the main steps you need to take when the tax authorities are looking for some answers.
Different types of audit require a specific response
A tax audit can be conducted in a number of different ways and the approach made by the tax authorities will determine how you respond and what documentation you need to prepare.
If you are subjected to a correspondence audit, for instance, this will be a general request for clarification of some information you have provided on your tax return.
This will normally entail the task of producing documentary evidence that you can supply to your local office.
In contrast, a field audit will involve a tax official coming to your premises to ask their questions and request supporting documents. Ask your tax attorney for the appropriate guidance based on the type of audit or investigation you are being subjected to.
The clock is ticking as soon as you are notified of an audit of your tax affairs and that means you need to act quickly.
Your first response would be to clarify the type and scope of the audit and then consider contacting a tax attorney to help you achieve the best possible outcome.
Take a cooperative approach
Another important step to take would be to take a positive and cooperative approach to the request for further information.
No one wants to be subjected to searching questions from the tax authorities but it is always far better to be collaborative and work with them to resolve the issues and find an acceptable resolution.
Your tax attorney can also guide you on how to respond in the correct way.
Resolve to not repeat the problem
Once you have managed to resolve your tax issues and agreed on a settlement and conclusion to the investigation you should have managed to restore your reputation as a responsible taxpayer.
Nonfiling and underreporting issues are not the sort of problems that you would be wise to repeat on a consistent basis, as that is likely going to lead to further scrutiny and penalties in the future.
If you are struggling to manage your tax affairs properly and struggle with some of its many complexities it would be a good idea to hire a tax professional so that they can present your information in the best way possible.
Having to answer some searching questions about your tax affairs is never a pleasant experience, but if you take the right steps and get some professional help, it should allow you to find a suitable resolution.
Always keep at least one digital copy of anything related to your taxes. Ideally, you should have at least two. You can keep one online (e.g. in a cloud drive) but you generally want to have (at least) one offline copy as well, for example on a CD.
Your tax records should include any factual evidence (e.g receipts), your calculations, your calculation methodology, and the reasoning behind it. In short, you want to be able to show not just what you did, but how and why you did it.
There are two key benefits to doing this. Firstly, if there is an issue with your taxes, you want to be able to demonstrate that it was an honest mistake rather than deliberate non-compliance. This can make the difference between getting a telling off and getting a heavy fine.
Keep in mind that tax authorities are generally well aware that their rules can be complex. Even a small business usually needs a lot more than a basic percent calculator to get them right. They’ll expect you to fix errors promptly (and not repeat them) but they won’t necessarily punish you for them.
Secondly, it will remind you why you (or your accountant) did what you did if you want to review your taxes at a later date. It may also make it easier for someone else to take over if you ever need extra help (or sell your business).