Will your financial records help you in a tax audit?

Getting a notice that you are being audited by the IRS or New York State Tax Department is scary. The worst thing to do is ignore it. Not responding to a notice will only magnify tax problems. It is far better to seek assistance from a professional and face the issues as you work together to reach a resolution. And one of the best ways to help your case is good financial record-keeping.

In a typical audit, agents will examine a vast array of financial records, including bank statements, bills, receipts, past returns, W-2s, 1099s, sales records, company ledgers (if the taxpayer is a business), and other evidence of income and expenses. The documentation varies depending on the reason for the audit. For example, in a NY residency audit where there is a question as to how much time the taxpayer spent within the State, taxpayers may have to show credit card statements, phone bills, E-Z Pass records, personal appointment calendars, and other information that may prove where they were located on a given day.

When it comes to businesses, record-keeping is even more critical. The IRS website provides guidance to businesses on what records they need to keep and for how long. New York State also has its own rules for businesses. For example, businesses that collect sales tax must meet strict requirements, such as sequentially numbering and dating records, maintaining checks and cash register tapes, and including sufficient details describing the taxability (or non-taxability) nature of each item sold. Failing to maintain such records means possible sales tax liability as well as additional civil penalties that the State may impose for inadequate recordkeeping.

Responding to an audit is time-consuming, expensive, and invasive. The more organized and accurate your financial records, the easier it will be for you and your attorney to deal with an audit. If you do get audited, these records will be needed to prepare and respond to the audit. They can also provide justification for more lenient treatment of tax delinquencies, such as proving you are a good candidate for an installment plan, offer in compromise, penalty abatement or other resolution.

If you’ve been notified of an audit, start putting together your financial records and contact an attorney for assistance.