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You Audit Know

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How to get yourself ready for an audit

Are you prepared for an IRS audit? Well, get ready, because you're a primecandidate, says Arthur D. Levy. The New York City CPA, who caters to small andmidsized businesses, contends, "Small-business owners and their businesses havea much higher incidence of being examined by the IRS than wage earners orcorporations." Why? "Business owners can't necessarily separate their personalfrom their business finances. They end up deducting expenses that have nothingto do with their businesses. That's exactly what the IRS looks for," Levy says.

What else does the taxing agency focus on that might trigger an audit?

* Large deductions for travel and entertainment

* Unreasonable compensation

* Excessively high bonuses

* Company perks (such as cars, apartments or club memberships)

What to do? First, says Levy, "Keep impeccable, meticulous records, andcarefully separate your personal finances from your business finances. Oneclient with huge American Express entertainment bills was audited by the IRSand harshly told he couldn't deduct any of them. My client produced a secondAmerican Express account reflecting personal entertainment expenses, therebydifferentiating his personal from his business expenses. That blew the IRS caseout of the water."

"If you do nothing else," Levy advises, "at least get separate credit cards andseparate checking accounts for your business and your personal expenses, andpainstakingly use each accordingly."

If notified that you will be audited:

* Contact the IRS. Ask for a list of items in question.

* Get organized. Compile all records relevant to contested items.

* Contact your accountant. Don't hide anything.

* Don't attend the audit--let your accountant deal with it. If you're compelledto go, keep your answers brief and to the point. Be honest and cooperative, butdon't volunteer information other than what's asked of you.

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