Have you ever been audited before? If not, you’re in for a real treat as an individual, and even more if you’re a business owner. There are ways to make it a little less painful, but what if you’ve lost some of your documents? What can you do?
It’s going to cost you both money and time, but you can still get through an audit successfully, even if you’re missing some of your documents. Auditors understand that documents can be lost or destroyed accidentally, and they are usually willing to work with you if you make it clear that you want to cooperate and you’re willing to help them complete the audit.
As soon as you’re notified of an audit, you must go into financial intervention mode. Gather any and all
documentation that is available for the year(s) under audit. In the case of a natural disaster,
there may be absolutely nothing left. For most taxpayers, however, the bulk of their documentation should be readily available.
Documentation will include both paper records and digital records.
Gather your bank statements, canceled checks, deposit
slips, credit card statements, and expense receipts. Missing data could
be recovered from banks, credit card companies, and companies with
which you did business, so be prepared to contact them if necessary.
When solid documentation is received from sources such as banks and
credit card companies, the process of piecing together a data behind a tax return is fairly straightforward. When you have gaps in the data, you might consider getting a forensic accountant involved. An experienced forensic accountant can help you reconstruct your records in a way which may help your auditor substantiate the numbers.
There are several ways to help substantiate deductions during an audit:
- Oral explanations or testimony can be used to support deductions.
If the taxpayer is credible and the explanation is supported by the
facts, the deduction can be allowed.
- Affidavits from people or businesses that can support your deductions can be helpful.
- Use data from other months, quarters, or years to prove patterns in numbers. For example, you may have only 6 months of telephone records, but it is probably pretty easy to estimate the rest of the year based upon those.
- Ratio analysis may help a forensic accountant estimate expenses.
- Available industry data also may be used to estimate a reasonable level of expenses.
These are not the only ways to prove income and expenses, but are
among the most common. It is important that the taxpayer make every
effort possible to gather documentation that supports reported income
and expenses for the year under audit, but these will be stopgap measures.
Working with an expert who is familiar with methods used to recreate
books and records is also a critical part of the audit process. Utilize
an advocate who can be creative and aggressive to calculate numbers
that are useful and believable, and which help the taxpayer achieve the
best result possible from the audit.