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6 Tips to Prepare for an Audit: How to lessen the Impact if the IRS Does Come Calling

No one likes an audit

Except maybe the IRS.

Have they ever knocked on your Payroll door

…letting you know that they’ll be auditing your company’s operations?

Audits are scary and stressful. Who knows what lurks deep in your records and throughout your processes. Even when doing ‘everything right’, it’s not fun to have outsiders poking around. Maybe everything will be just fine. Maybe not.

It’s the unknown that causes sleepless nights.

Audits eat up time. It usually takes a team of people to prepare for an audit, which is also distracting. Your team must put your primary job responsibilities on hold to prepare for the audit. It takes time to collect the proper records and respond to an auditor’s questions. Who does your regular responsibilities while the audit is going on?

Audits cost, if you’re judged to be non-compliant. Hefty financial penalties can be assessed. How much? Depends on the type of audit. More on that down the page.

Your brand can suffer. You built and polished your brand over years, decades even. It’s a PR nightmare to lose that in a moment. If judged non-compliant, and you’re a major player in your space, the business world is sure to know. And customers, too.

Building your image back up, is almost like starting over.

All this sound like something you want to avoid?

Or at least, not lose any sleep because you’re confident your team is doing everything plausible and possible?

 

Types of audits

Here are the main audits the IRS conducts. They range in severity. The more you’re prepared, the less likely you’ll pay any significant fines.

Correspondence audits

The least severe audit.

You’ll receive a letter from the IRS in the mail for Correspondence audits, usually requesting information about a previous tax return.

Often, for small issues, Correspondence audits are done through mail. If you maintain proper records, these audits can be resolved rather quickly.

office audits

Office audits

When the IRS has questions about a more substantial tax-related inquiry, count on getting invited to their office for an audit. You learn of this by mail.

The Office audit is more serious than the Correspondent audit. You’ll probably want to bring your tax experts with you.

Office audits are usually completed in a day. If needed, they’ll give you more time to supply any missing information.

Field audits

The most serious and comprehensive, of audits.

The IRS is a coming to an office near you—yours, that is.

Why?

Because the IRS auditor wants to see “other things”. 

More than just the usual items. Like any forms or previous tax docs. Absolutely, you’ll want representation for any Field audit.

They’re coming over because they’re “looking for something”.

 

6 Steps to be prepared for an audit  

Getting audited isn’t something you control, obviously. You can control the effects of any audit. And, lessen your odds for experiencing any severe audit.

Here’s how…

payroll record-keeping

1) Keep proper records

So you can see how you’re doing and know what to do, if the IRS comes knocking.

Incorrect or incomplete records will make it difficult to explain yourself to the IRS. Having easy access to all historical records, for current and past employees, will.

Having proper record storage practices also will save your team valuable time when preparing for an audit.

Complete and accurate records will help justify your operations and practices. 

So that, the IRS will leave as fast as they arrived.

No drama. No big costs. Back to business as usual.

Otherwise? The IRS can impose hefty fines for poor record keeping and storage.

Going from paper-based tax forms to an online system enables you to automate the completion and storage of tax forms–paying big dividends when you need to access records quickly.

Automate the collection and on-going storage of employee tax withholding forms

Help your employees provide the right tax information for federal, state and local tax forms. The first time. Every time.

2) Get it right the first time

…for collecting and completing information.

Staying compliant is not so easy if you’re spending time doing re-work. Collecting the proper tax withholding information for employees is complicated by the numerous state and local tax requirements.

Using an automated online system helps to eliminate this complexity and ensure the right information is captured.

Then, if the IRS asks… you can quickly give them the information they need.

‘Ahhh’ versus ‘arrrg’.

 

3) Be in the know

Don’t leave it to chance that employees are completing their forms on time.

As a payroll administrator, you need to know if and when forms were started, still in-progress and completed. And, be able to assign follow-up activities if/as needed. Because there often are.

Like, route, review, and approve, so other people can participate in the entire process.

The IRS likes to see that your company has the proper governance processes in place.

Yet again, hard to do with a stack of papers. 

Easy to do with an online platform for your entire organization to use. Where forms and related documents are always ‘in the right state’. And easy to find.

No stumbling and fumbling through your paper-based approach, when going paperless.

payroll team training

4) Ensure your team is properly trained

…and has the right processes in place.

Collect, access, share, and manage employee information and forms—the name of the always-be-prepared-for-an-audit game, right?

Training matters, too.

Payroll teams, your onboarding teams and other key players must be well versed in your tools and processes. 

Also, consider triggers to stay actively engaged. For instance, assign someone, or a group, to actively monitor regulatory changes the IRS makes.

Then, adjust your processes as needed.

The IRS expects that you know what they know when it comes to ‘being current’. Typically, more than half of all tax withholding forms get updated each year.

5) Conduct self-audits

Because being compliant comes ‘from within’.

Sounds Zen…yet true.

A self-audit helps you improve your organization’s practices. Proactively.

It allows you to analyze your current position, identify your priorities and create a plan to improve employee and company performance.

Develop a set of questions for all your HR and Payroll operations. Answer them. Apply the results throughout your operations. More steps and ideas here.

Reduce costs, improve compliance. The IRS will see you as fit and tidy. Just what you want.

 

6) Invest in technology

Paper-based vs paper-less… seeing the pattern?

Especially as your company grows.

Compliance, and nearly everything else, becomes more complex. You’ve got to stay on top of this. Most of your competitors are.

Automated online applications are easy to buy, even easier to upgrade. The cloud helps with all this. No need to buy and configure upgrades every couple years. It’s done without even noticing, by the vendor. And…

Your provider should manage any regulatory updates automatically. 

Managing your employee tax information any other way leaves too much to chance.

 

Stress.

Time.

Money.

Your people.

Your brand.

All potential casualties when judged as non-compliant.

The good news?

There’s a lot you can (and should) do to lessen the impact of any IRS audit.

Survive and thrive an IRS audit, or avoid one completely.

That’s the plan.