How to Challenge the IRS as a Small Business

As the owner of a small business, you will find filing with the IRS is a complicated and often uncertain undertaking. After you file, the IRS may either ask for additional taxes from you or even audit your tax records. You do not simply have to stand back and allow the IRS to do this. There are a number of steps you can take to proactively show you filed correctly and do not owe additional payments. You should know that most tax challenges are costly and time consuming. However, if a large amount of money is at stake, it can be well worth the effort.

Hire the Right Professionals

You will need to work with a Certified Public Accountant (CPA) in order to file your return. It will be very difficult for you personally, unless you have extensive accounting experience, to carry out the proper challenge. In addition, you may want to consider a tax attorney. An attorney will be able to assist you with legal issues regarding your return, while an accountant can only prepare the numbers correctly. An attorney is often more costly. If you cannot afford an attorney, consider using a law school student who is studying tax law and may volunteer services. 

Determine Wages and Income

You must start by determining how much income your business earned over the period for which you are being audited or asked to supplement your taxes. The IRS can provide you with a Wage and Income Transcript if you request one. You can speak with a local taxpayers' assistance center (TAC) in order to request the transcript instead of going straight to the IRS. You accountant may also have these records for you. If you have saved your reporting statements over the years, use these and compare them to those you receive from the IRS. 

Recreate Expense Reports

You will need to provide exact records of all your deductions in order to challenge the IRS. If you have kept excellent records, congratulations--your work has finally paid off. Unfortunately, many small business owners do not keep records as well as they should. So, you will have to go back and recreate your expense reports. In most cases, a credit card statement will suffice in lieu of a receipt in order to prove an expense. When you are going back many years, you will likely have to go to the bank in person to request statements, but the bank should be able to furnish them.

Recreate Supplemental Reports 

Mileage logs, rent reports and other expenses will also have to be recreated. You can recreate mileage logs based on credit card statements for gas, etc., but this is a very detailed process. Unfortunately, with an IRS audit, the details are the most important thing. Be as accurate as possible in gathering records showing your supplemental expenses. For example, if you are deducting your vehicle registration, request a receipt from the DMV directly. If none is available, research registration fees for the year you are deducting and provide this as an account of your likely expense.