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Audit Angst?

New tax rules can help ease your fears and keep IRS visits short and succinct.

It's no exaggeration to say that most entrepreneurs would prefer a root canal to an IRS audit. The thought of IRS scrutiny terrifies even the bravest of souls. But if your return is selected as part of this year's audit process, don't despair.

For one thing, taxpayers now have more rights than ever when it comes to dealing with the IRS. Under the IRS Restructuring and Reform Act of 1998, the tax agency has been encouraged to speed up the audit process. If it doesn't provide notice of an audit to the taxpayer within 18 months after a return is filed, interest and certain penalties will be suspended. Beginning in tax year 2004, the IRS will have to provide that notice within 12 months.

The law also restricts the use of "lifestyle" audits. When performing this type of audit, the IRS used to ask for extensive information about the taxpayer's financial status, standard of living, and other information not directly related to the tax return. Now it can request this information only if it has a reasonable indication, based on the tax return itself or third-party information, that the taxpayer has unreported income.

Another plus for entrepreneurs: The collection processes used by the IRS have greater limitations. The IRS must now follow the same rules as private debt collectors when communicating with debtors, such as not being able to contact individuals before 8 a.m., after 9 p.m. or at their places of employment.

If you are selected for an audit, having these protections in place makes it possible to get through the process with relatively few nicks and bruises, say tax experts. Just be prepared, have the right attitude and show them your flawless records.


Joan Szabo is a writer in Great Falls, Virginia, who has reported on tax issues for more than 13 years.

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This article was originally published in the May 1999 print edition of Entrepreneur with the headline: Audit Angst?.

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