The audit process is no picnic. It is invasive. It is disruptive to your business. It raises real dangers of being assessed substantial tax assessments and penalties. It subjects business owners to a certain indignity, so to speak, of being told by an outsider that they are running their business improperly, and should change.
Notwithstanding the unpleasantness of an audit, one of the biggest mistakes a business owner can make is to start an audit showing disdain for the process or the auditor, and to attempt to put the auditor “in his or her place.”
The reasons to be respectful and courteous are simple:
First, it’s always a good idea to be civil and courteous to people doing their jobs, even in cases where they do it poorly.
Second, while auditors are charged with conducting audits in accordance with the law and agency policy, within those limits, they control the scope of an examination and have tremendous discretion in determining the direction of an audit. Given human nature, an auditor is much more likely to exercise his or her discretion (e.g. limiting scope of audit, minimizing penalties, cutting breaks, and yes, even ignoring certain deficiencies) in favor of a business owner who treats the process and the auditor with respect.
Third, the absolute best time to impact your audit results is during the audit. Therefore having a proper and functional relationship with the auditor gives you the best chance of explaining your business, addressing the auditor’s questions and concerns, and correcting misunderstandings by the auditor.
Besides this big mistake, here are some other mistakes business owners make during audits:
- Not addressing compliance obligations before the audit occurs. Failing to address compliance obligations before an audit occurs is not technically a mistake made “during” an audit, but it occurs with such regularity, and it is so consequential, that it is worth it to sound this warning to business owners early and often. An ounce of prevention, folks.
- Delaying audit dates. While rescheduling audits are inevitable, repeated delays and rescheduling may lead an auditor to presume a business owner has something to hide.
- Failing to produce responsive information. Businesses have an obligation to produce requested information. When they don’t, auditors can and do draw unfavorable conclusions and/or make incorrect audit findings as a result. Strive to be cooperative.
- Disclosing too much. While it is important to be responsive to the auditor’s written and oral requests for information, producing more documents than requested, and answering more than the question presented, can open the proverbial can of worms.
- Being deceptive. Don’t do it. The end.
- Presuming the auditor is your friend. While I discuss being courteous above, one should not presume that the auditor is a trusty friend in government looking out for one’s best interest. The reality is that some auditors come to your business with preconceived notions including an expectation that they will assess back taxes and penalize you for…something. It is therefore imperative to look out for yourself and understand your rights and obligations, and not presume the auditor will do that for you.
- Forgoing hiring an experienced audit attorney or audit professional. An audit is not simply an examination of your business practices. It is an examination of those practices in light of the applicable law. An experienced audit attorney, among other things, can prepare you for the audit, help you understand your rights and obligations, keep you from making the mistakes above and others, and therefore reduce your chances of reaching an incorrect audit result.
- Failing to take advantage of appeal rights. Audit determinations are not final and therefore subject to appeal. While appeals are not advised in every situation (indeed, in some cases you’re better off paying the assessment and moving on), auditors are hardly infallible and do make errors that result in substantial additional tax assessments and penalties. It is therefore prudent to consider the cost/benefit of appealing before simply paying assessed amounts and penalties.
- Failing to timely appeal. Appeal deadlines are firm, and once the time for appealing has passed, the right to appeal is often gone forever. Therefore, note your appeal deadline and submit your appeals on time, and preferably, with time to spare to avoid fights over whether the appeal is timely.
For more information on audits and appeals and compliance obligations, consult with an experienced audit attorney.
