Monthly ArchiveSeptember 2016

How To Bring Money from India to the US ?

Many American Indians, non-resident Indians (NRIs) and persons of Indian origin (PIOs) have immovable assets like a house that they have left behind in their country. They may also have inherited assets like house or money from their dearly departed.  Most of the time, these people plan to liquidate these assets and bring them to the US. This is particularly true if they don’t have plans of going back to India, or they rarely visit their motherland.

American Indians, non-resident Indians (NRIs) and persons of Indian origin (PIOs) who want to bring money from India to the United States will have different processes to go through.

The processes may depend on the method by which the money was acquired, like selling a property in India, getting an inheritance, or investing in financial instruments. This article will look at the different ways of bringing money from India to the United States.

Selling of property

Any NRI can sell a commercial or residential property in India to another NRI, PIO, or a person who resides in the said country. But NRIs cannot sell agricultural land or farmhouse to another NRI, as they are only allowed to do so to an Indian citizen who also resides in the Asian country.

NRIs are also allowed to repatriate or bring money from India from the sale of a maximum of two residential properties.

Sale proceeds should be credited to a non-resident ordinary (NRO) account. This is a savings account where the NRI or PIO can maintain and manage their income earned in India like dividends, pension, and rent, among others.

If the property was sold at least three years after the date of purchase, the individual will be levied a long-term capital gains tax of 20 percent. This is calculated by subtracting the sale value from the indexed cost of purchase, or the cost of purchase as adjusted for inflation.

NRIs are allowed to repatriate or bring their sale proceeds of property sold in India to the US. However, the limit to the amount brought from India is $1 million per calendar year, including all other capital account transactions. NRIs, though, can petition to the RBI for an increase in the repatriation limit as long as they can prove that there is a genuine need for it.

However, NRIs who were able to purchase a property in India while they were still a non-resident can still repatriate the proceeds from the sale. But they should have bought the property in accordance with foreign exchange laws during the time of the purchase.

The amount to be transferred must also not be more than the amount remitted through a foreign exchange to India through banking channels. If the NRI purchased the property using funds in a Foreign Currency NonResident account, then the repatriated amount or proceed from the sale must not be more than the amount paid through the said account.  Also, if the NRI purchased the property via a home loan, then the amount to be brought from India should not be more than the amount of loan repayment.

To bring the proceeds of the sale of property from India to another country, NRIs or POIs should course it through legal banking channels. This would give them the peace of mind knowing that their money will be safe.  NRIs are cautioned against relying on private money transfer or “Hawala” as this is considered illegal. There’s a risk that they may not get their money out of India if they opt for the said process.

To begin the transfer of money from India to the US, the NRI should get a certificate from a chartered accountant (CA) in India.  The CA will issue a certificate information or “Form 15CB” which is also downloadable from the Indian government tax website. This is the link to the download page.

The form is basically a certificate that the money to be sent abroad has been acquired from legal means like the sale of a property. It also vouches that all taxes due have been paid. The CA must fill in the form and sign it.

Once the Form 15CB has been completed, the NRI must fill another form called Form 15CA.  This is a form that is to be filed online with the Indian tax department. It can be downloaded from this link. Some of the information needed in Form 15CA can be found on Form 15CB.

The form is to be submitted online, with the NRI receiving a system-generated acknowledgement receipt or number. The filled form 15CA along with the acknowledgement number must be printed out and signed.

Then the NRI will have to bring the signed undertaking along with the CA certificate on Form 15CB to the bank where he/she has an NRO account.

Aside from Forms 15CA and 15CB (in duplicate copy signed by the CA), the bank will also request the NRI to fill up Form A2 as well as an application for foreign exchange form. The latter is used to vouch that the person who will be sending the money to another country did acquire the money through legal means; in this case through the selling of a property.

Some banks may also require the NRI to provide documents like a copy of the sale document of the property. If the NRI inherited the property, then he will have to present a copy of the will, death certificate of the original owner of the property, and legal heir certificate.

The bank will then process the transfer of the money abroad.

Getting an Inheritance or Gift

In India, the property inherited is fully exempted from gift tax. However, the amount on the sale of the asset is taxable under capital gains. Calculation of capital gains from an inherited property is the sales proceed less the original cost of purchase of the bequeathor.

It may be short term or long term, depending much on the period for which the property or asset was held.

In the US, there is an inheritance or estate tax levied at the time of inheritance. But this is only levied if the bequeathor or the deceased individual was a US citizen, resident, or Green Card holder.

NRIs, PIOs, or American Indians will have to  report the money that they are bringing in to the US from India. They are to do this by filing Form 3520, an information return and not a tax return. There are significant penalties awaiting those who cannot file the said information return.

Form 3520 is an annual return to report transactions with foreign trusts and receipt of certain foreign gifts. It can be downloaded from here.It must be filed along with the tax return of the NRI, PIO, or American Indians who inherit a property in India. This not only applies to property but also other financial assets such as cash and investments.

There are two reasons why Form 3520 has to be filed by those who want to bring money from India to the US. One is that it proves a trail of the individual’s receipts. For example, an American India who inherited $100,000 or more and wishes to repatriate that amount to his US bank account will be able to establish the source of that money by filing Form 3520. The same goes for an NRI who sold a property in New Delhi and wants to transfer the proceeds to his US bank account.

It also establishes the basis of the inheritance of the individual. The basis here pertains to the fair market value of the inheritance during the death of the person who bequeathed the property to the individual filing the Form.

The IRS requires filing of Form 3520 during cases wherein the individual receives an inheritance of $100,000 or more. But tax experts suggest report inheritance even if the value is lower than $100,000 because it can establish a trail of receipts.

If the individual received separate gifts from related parties, the amount should be aggregated. For instance, the individual received $70,000 from an uncle in India and another $50,000 from another aunt. Because the aggregate amount of the cash gifts is $120,000, then he or should file the Form. This must be particularly reported in Part IV of the said form.

The due date for filing the Form 3520 is the same as the due date for annual income tax return filling.

There is another form that American Indians have to file if they inherited financial assets in India and wish to bring those assets to the US.

Form 8938 is a requirement for all US residents, citizens, and Green Card holders to report foreign financial assets like bank balances, mutual funds, shares of stocks, government securities, and others if the aggregate of these assets is more than $50,000 for single taxpayers, and $100,000 for couples.

Investments in Financial Instruments

 Another way for NRIs or PIOs to bring money from India to the US is to invest in financial instruments like debt investment and equity investment.

For debt instrument investment, NRIs and PIOs can invest in a non-resident ordinary (NRO) fixed deposit or a non-resident external (NRE) fixed deposit. Many NRIs and PIOs are attracted to these financial instruments, what with the relatively high rates of 8-9 percent.

American Indians can remit proceeds from their NRE accounts freely or without the cap. But for NRO accounts, they are limited to a ceiling of $1 million in a year.

Also, the interest earned in NRE accounts is not to be levied with tax. On the other hand, interest earned in NRO accounts is subject to tax.

Other financial instruments that NRIs can invest in are foreign currency non-resident or FCNR deposits where the investment is in dollar, yen, and the euro. These are term deposit with the interest dependent on the LIBOR rate for the particular currency. Interest income from FNCR deposits is not levied with tax.

However, NRIs are not allowed to invest in the Public Provident Fund and National Savings Certificates debt instruments issued by post offices.

For equity investment, NRIS can invest in direct equities or equity mutual funds.

Whenever interest or proceeds of financial instrument investments is remitted or repatriated by an NRI, he or she has to submit Form 15CA at the Indian income tax department’s website.

Most of the time, a certificate coming from a chartered accountant as provided in Form 15CB is also needed before the NRI can upload Form 15CA online. In Form 15CB the CA vouches for the details of the payment, Tax Deduction at Source (TDS) rate and TDS deduction, as well as other details of the remittance.

This certificate is very important because banks won’t remit the money until this certificate has been provided.

But Form15CB won’t need to be filed when a single remittance is less than 50,000 rupees, and the total remittance in the year is not more than 250,000 rupees. In this case, the individual only has to file Form 15CA.  Exemptions to Form 15CB filing also include deduction of lower TDS, as well as the receipt of a certificate from the assessing officer under section 197.

Also, any remittance of funds to an NRI will require the remitter to present a certificate from a chartered accountant that Form 15CB ad Form 15CA have been filed at the Indian tax department’s website.

Finance Bill 2015 imposed this requirement starting June 1, 2015, stating that all forms have to be filed for all remittances whether it is taxable or non-taxable. Central Board of Direct Taxes had earlier required the said forms to be filed for taxable transfers, while most banks asked for said forms even for non-taxable transfers.

While repatriation of funds from India to the US is not as complicated as it appears to be, it would still be recommended that NRIs, PIOs, or American Indians work with a chartered accountant in India and a professional CPA familiar with Indian laws in the United States. The professional can counsel them in the intricacies of the Indian tax code, particularly those that affect their assets that they would want to be repatriated to another country.  The CA can also help in the filing of appropriate forms as required by the IRS for people who will be bringing their assets from India to the United States.   Our office specialize in these kinds of cases, so feel free to contact us with any questions.

Understanding Hillary Clinton’s Tax Plans

Democratic presidential candidate Hillary Clinton has vowed that she will make sure the wealthy and the largest firms will be paying their fair share while providing tax relief to working families. According to her, the economy should work for everyone and not just at the top of the food chain. She has committed to restoring fairness in the US tax code, vowing to create more jobs in the US and make the economy more competitive in the long haul.

Clinton has pledged to do the following:

  • Restore fairness to the US tax code by implementing a ‘fair share surcharge’ on multi-millionaires and billionaires. He will also champion for measures such as the Buffett Rule in a bid to ensure that the richest citizens in the country won’t be paying a lower tax than middle-class families.
  • She has also assured that her administration will close loopholes in the current tax code so that multi-million dollar estates will be paying their fair share of taxes.
  • Put a stop to corporate and Wall Street tax loopholes such as inversions that reward firms for shifting profits and bringing in jobs overseas. She has stated her desire to charge companies that leave the US, levying an exit tax on those firms that get away with untaxed foreign earnings.
  • She also said that she will be closing tax loopholes that allow Wall Street money managers to pay lower taxes than some middle-class households. And under the Clinton administration, businesses that bring in much-needed jobs in the US will be given lower taxes.
  • Simplify taxation for small firms to encourage the growth of the micro, small, and medium enterprises. In turn, these firms can grow and hire more people. In particular, she is setting sights on freeing small businesses with 1-5 employees that spend more than a thousand dollars on federal tax compliance. According to her, that is more than 20 times higher than the average for bigger companies.
  • Provide tax relief to working families and shield them from the rising costs of day-to-day living. She has particularly offered tax relief for Americans who are facing excessive out-of-pocket health care expenses as well as those who are taking care of an elderly or ill family member.

A Closer Look at Clinton’s Tax Plans

Here are the major points of Clinton’s tax plans:

  • Charging a 4% surtax on adjusted gross income or income earned in excess of $5 million. This proposal would affect the so-called high-income tax payers or roughly one in every 5000 tax payers. In the long run, it is expected to raise around $150 billion in tax revenue for the federal government.

However, the income tax rates for individuals, married tax payers, and heads of households earning less than $5 million a year will not be affected or changed at all.

  • Imposition of the so-called Buffett Rule that would call for a 30 percent minimum tax on taxpayers who have an adjusted gross income of more than $1 million.

To the uninitiated, the Buffett rule was coined by outgoing US president Barrack Obama who had noted of billionaire Warren Buffett’s criticism of current tax policies.  In 2011, Buffett wrote that he had paid lower tax rates than his secretary.

According to Clinton, the imposition of the Buffett Rule would be one that would             help the nation achieve greater fairness in its tax system.

  • Raising capital gain taxes on high income investors. High income fliers, or those who are earning more than $400,000 make a lot of money from capital gains. In the current tax code, these high income investors pay a 20 percent tax on realized gains from investments that were held more than a year. Clinton is amenable to preserving the rate but only for investments that were for a minimum of six years. She bats for investments that were held less than six years to be taxed on a sliding scale. This would encourage investors to think long term as they have a tax incentive to hold onto an investment.
  • Raise tax rates on big estates. If Clinton gets elected, expect money and assets left to heirs to be tax heavily if these come from a big estate. She also wants to tax estates worth more than $3.5 million, and $7 million for married couples. These are far lower than today’s estate tax exemption level of $5.45 million for individuals and $10.9 million for couples.
  • She also wants to estate tax rate to be slashed to 40 percent from 45 percent.

For business taxes, Clinton wants the following:

  • Standard deduction for small businesses
  • Raise the limit for foreign ownership in inversion transactions to 50 percent of combined company shares from the current 20 percent
  • Impose a corporate exit tax on unrepatriated corporate earnings
  • Tax high frequency trading although the rate is still to be determined
  • Provide tax credits for investments in community development and infrastructure
  • Reform performance-based tax deductions for top earning executives of public firms
  • Eliminate tax incentives for fossil fuels

Impact of Higher Tax on High Income Earners

The nopartisan Tax Policy Center estimates that taxpayers in the upper echelon would have to deal with an average tax increase of $4,527, representing a 1.7 percent reduction in after-tax income. Those who have incomes in the $295,000 and $732,000 range would have to pay $2,700 more in taxes. Those in the 0.1 percent with income greater than $3.8 million will also have their taxes increase to about $520,000.

The four percent surcharge that Clinton is proposing stems from a report by the IRS that in 2013, the 400 top income payers paid an effective tax rate of 23 percent brought about by lower rates on capital gains and other tax loopholes.

Not surprisingly, the bottom 95 percent of the taxpayers will not see any changes to their taxes. The Tax Policy Center says that if Clinton’s tax proposals are enacted, this would translate to an increase in revenue by about $1.1 trillion over the next decade.

The Tax Policy Center also notes that almost 80 percent of tax increases in a Clinton administration would affect only 1 percent of the population in the first decade. One in the 1 percent would owe as much as $120,000 more while the poorest citizens would owe $6 more.

But the Tax Foundation, a top independent tax policy research organization, sees Clinton’s plans as having a detrimental impact on the economy. In the long run, it could reduce the economy’s size by 1 percent according to the foundation’s Taxes and Growth Model.  It is also projected to lead to nearly 1 percent lower wages and 311,000 fewer jobs as well as 2.8 percent smaller capital stock.  The foundation states that these are a result of higher marginal tax rates on labor income and capital.

The National Center for Policy Analysis’ Tax Analysis Center supports those claims of the Tax Foundation. In backing up the claims of the Tax Foundation, the NCPA says that the tax plan of Clinton will also hurt other taxpayers and not just the rich contrary to what her drumbeaters are saying.

A study conducted by NCPA senior fellow Dr. David Tuerck shows that while federal tax revenues would increase if Clinton’s tax plans are implemented it can also affect the income of the general population.

In the said study, the top 10 percent of income earners would lose almost 2 percent of their broadly measured income in 2017. Moreover, the poorest 10 percent of the population will lost around 0.7 percent of their broadly measured income which is the largest loss among the bottom 90 percent of the population.

The study points out that taxing high-income earners can slow down economic growth, which can hurt even the lowest income earners.

Taxes on Small Businesses

Clinton says she is proposing a scheme called “checkbook accounting” that will make filing taxes for small firms as simple and easy as keeping a checkbook or printing out a bank statement.

The standard deduction for small businesses is designed to allow small businessmen to take a standard deduction instead of tracking expenses like rent, phone bills, and office supplies. There’s still no specific amount of percentage discussed, as this would be up to Mrs. Clinton’s treasury department to refine the idea.

Many observers think that the idea will help businesses, because it would be much simpler for them to file taxes. It is also seen to provide a net benefit to small firms as they can still choose to list of all their deductions, and as such any firm will be able to choose the option most favorable to them.

However, others point out that the benefits of this tax proposal aren’t that big for small firms. Most firms today rely on technology such as apps to track their expenses. They also use those files for filing of their taxes.

Capital Gains Taxes Impact on investors

Clinton’s tax proposals will also have an effect on investors in the country. As mentioned earlier, Clinton is batting for six capital gains taxes, with longer holding periods getting the lowest levy.

Clinton believes that by encouraging shareholders to hold on to their assets for the long haul, companies will be able to engage in moves that create long-term value like investing more in employees and raising wages instead of buying back shares.

The Tax Policy Center estimates that Clinton’s plan to increase capital gain taxes on investments held for shorter than six years would raise around $84 billion over a decade. This is assuming there will be little changes in investing patterns.

But the Tax Foundation says those plans will reduce tax revenues as it would push investors to hold on to their holding a lot longer.  The organization says that this proposal would likely result to a loss of around $375 billion on a static basis, as it can reduce number of capital gains realizations.

The mutual fund industry is expected to be hit by Clinton’s capital gains tax proposal. If Mrs. Clinton’s plan pushes through, the belief is that investing in ETFs will become more popular than actively managed funds which have a 2-3 year time horizon.

Impact of Exit Tax on Companies

Another pillar of Clinton’s tax program is charging expatriating US firms an ext tax based on their offshore earnings. Clinton’s explanation is simple – “if they (companies) want to go, they have to pay to go.”

Clinton wants firms that have their tax residency moving to a non-U.S. jurisdiction to immediately pay its corporate income tax on overseas income that it has deferred.  The concept is basically asking for corporate exiters to pay before they escape.

This proposal is seen to counter the move of many US firms to shift their tax jurisdiction out of the US, which has the highest corporate tax rate at 35 percent. If this proposal comes into being, firms will face penal provisions for shifting tax residency abroad to leverage tax advantages.

Interestingly, this is an issue that is seen to protect the interests of US workers which Clinton’s rival Donald Trump has also championed by blasting trade deals like the North American Free Trade Agreement.

Conclusion

While Clinton’s tax plans appear to cater to the majority of US taxpayers, the consensus of many experts is that it would be detrimental to the economy in the long run. Although most of her policies except for the capital gains policy would likely raise tax revenue, organizations like the Tax Foundation believe that her plans will impose higher marginal tax rates on capital and labor income. This can then result to a slowdown in the US economy in the long run. This detrimental effect on the US economy will overshadow the revenue that Clinton’s tax policies could collect.

Indeed, Clinton’s tax plans appeal to a larger part of the population but a closer examination of her tax program reveals that there is still a lot to be improved on.

tax audits

Dealing with IRS and other Tax Audits

It’s one of those fears that bog the minds of rich people and even ordinary taxpayers—getting audited by the IRS. But what are the chances that you’ll be audited by the government for your tax returns?

The chances of a tax audit are very low these days. Taxpayers with moderate income levels have a 1 percent chance; while those earning $1 million and up were audited at a 7.5 percent clip.

For companies, the rates are also low. Firms with total assets of less than $10 have a 1 percent chance. Those with assets between $1 and $5 million have a 1.2 percent rate, while firms with asset size of between $5 and $10 million have a 1.9 percent chance of being audited. Even the middle-sized firms or those with assets between $10 and $50 million had a low 6.2 percent chance of being audited.

Sure, the chances of getting a visit from the IRS have shrunk to all-time lows. But that should not be enough reason for you to be complacent. It still pays to know what to do just in case someone from the IRS knocks at your door or you get a letter from the said agency.

Individual Tax Audit

You may not be a millionaire but there are conditions that can increase your risks of being visited by the IRS:

• Being self-employed. There are lots of write-offs that self-employed taxpayers can claim, unlike most employees. These range from a home office to the use of a car, and the IRS may have queries about these claims.
• You have itemized deductions that are a lot higher than those of taxpayers with comparable incomes. The tax department will likely flag your return when it notices that there’s a big difference between your write-offs and averages.

Should you get a notification that you are to be audited, don’t panic. Keep in mind that the audit will be done in a professional manner. And if you can give the IRS people the right paperwork then you will be off the hook, so to speak.

You must not also think of ignoring the IRS. Your problem won’t go away. Worse, your interest and penalties will continue to accrue. So the earlier you deal with it, the better.

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Types of Audit

There are three types of audit. The more common is correspondence audit, which is handled by a way. According to the Transactional Records Access Clearinghouse, 76 percent of individual audits were of this kind.

These computer-generated correspondences may tell you that there was a mathematical error on your return, or that your return wasn’t the same as the 1099 statements that the IRS received from your bank or broker. In these cases, you simply send the money that you owe.

The letter may also dispute a tax break that you claimed. If you can’t prove that you were correct, then you will have to pay additional taxes.

But what if you’re right? You’ll have to collate the right paperwork then send it back to the IRS through certified days within 30 days of receipt of the letter. You’ll also have to prepare a letter that includes a copy of the correspondence audit plus your reference number.

In some cases, you imply have to go back and get receipts. But there are cases when you can’t do that. Instead, you may have to get a written acknowledgment from the charity that you gave to in order to claim a charitable contribution.

This is a task that you can handle yourself, especially if the issue is simple enough to reply to. You may ask a tax pro to help you out, but you’ll obviously have to pay him or her for the service

If you feel you are deserving of the tax break but you want a stronger case or reply to the IRS, a tax professional can be of significant help. He or he can prepare your return respond to the agency, and give you a better shot at defending your case.

The second type is field audit, which is conducted in person at your home or at IRS offices. However, the chances of an IRS guy dropping by your home are very low these days. The agency is no longer conducting a lot of field audits because these often mean additional expenses.

This type of audit is conducted when the IRS has lots of questions about your return. The agency may also resort to this type of audit when there is a certain write-off that is difficult to handle by mail.

The field audit in an IRS office shouldn’t last more than four hours. However there will likely be a follow-up visit, or the agency would require you to pass additional paperwork.

The last type is the ‘random’ audit. Among the three types of audit, this is the least likely that the IRS will conduct. You have a very slim chance of being selected for this audit.

But then again, it pays to be prepared.

The random audit is perhaps the most detail-oriented and intrusive of the three types of audit. IRS agents may even ask for your birth certificate and marriage license just to check your filing status.

This is also the type of audit where a professional expert can help you. There’s a good chance that something will happen at the audit that can cause the agency to demand you to pay more. With the help of a pro, you’ll be ready just in case the proverbial can of worms is opened.

Attitude During the Audit

Whether you are going to the IRS office or accompanied by a tax pro, you need to behave professionally during the audit. Don’t become argumentative, and treat the agents with respect.

Be honest and truthful with your answers. But you should also answer straight to the point. Avoid talking too much because the more you talk, the more questions that the agency will have.

You should also come to the office prepared and organized. You don’t want to upset the agent with your messy folder and jumbled receipts.

If you are unable to provide the document the agent is looking for, politely ask if there’s any other documentation that you may provide in lieu of the document. For example, you claimed the business use of a vehicle but couldn’t show receipts for gas. Maybe a calendar of your business meetings may be accepted as a substitute.

You can go through the appeals process if you disagree with the contention of the agent. This is where a tax pro can help you as he or she would be able to handle this step.

So what happens if you have to pay the IRS more money but you don’t have cash? You have three choices—one is to pay with a credit card, although you will have to pay a convenience fee of around 2.35 percent. You can also for an installment agreement or request for a compromise.

Business IRS Audits

Again, the chances of a business getting audited by the IRS have gone down in the past few years. But this still should not give your company a false sense of security.

What are the possible issues that the IRS will look into your company’s tax returns? Here are some of the red flags that should make the IRS agents knock on your door:

1. Net loss in more than two of the past five years.
2. Excessive deductions for travel, business meals, and entertainment
3. High salaries paid to shareholders
4. Shifting income to tax-exempt organizations in a bid to avoid payment of taxes
5. Claiming 100 percent business use of a vehicle

Like in individual tax audits, it is important for a business to be prepared if it has been picked for an audit. There’s a silver lining to being audited, as if the agency’s findings show that there is no change to the tax liability then the business won’t be audited on the same issue for the next year.

Hiring a tax professional is the first step that you need to undertake if your business has been pinpointed by the IRS for auditing. Don’t be anxious in thinking that this will indicate that your business is guilty, after all, the IRS is very much used to this practice. A tax professional can help you through the audit.

You can even sign a power-of-attorney agreement to give your tax professional the legal authority to deal with the IRS directly. This is ideal if you are unsure of what to say and what not to say during the audit. This basically takes you out of the loop and puts your tax professional in.

But there are three things that you, as the business owner, should remember when your business is faced with the prospect of being audited by the IRS:

1. Review the audit letter carefully.

An IRS agent won’t just barge into your door and announce an audit. The agency will send an audit letter to your office informing you that your firm has been picked for the audit.

Be cautious with scammers who will masquerade as the IRS by sending you email messages or leaving phone messages. Those guys will attempt to hack your personal data. The real IRS doesn’t communicate through email or phone.

Once you receive the letter, open it promptly. Read and understand what the IRS needs from you.

If your company doesn’t have a financial adviser, you can hire an accountant or tax professional to help you review the review letter. He or she will also identify the issues that the agency has flagged.

Don’t ignore the letter because the IRS will not go away. Worse, the auditor may become more suspicious and even antagonistic.

2. Organize your records.

The next step is to organize your records. Gather and organize all your business records from the previous tax year even before you meet with the tax professional and IRS auditor.

These records range from receipts and invoices from income and expenses, accounting books and ledgers, bank statements, leases or titles for properties and hard copies of tax-prep data. You should also make sure that you have the specific documents requested by the IRS for review.

3. Answer the questions honestly.

During the audit, the IRS agent will ask you a lot of questions about the information reported on your business tax return. Simply answer the questions of the auditor—no more, no less. Giving any information that you are not required to give may put you in more hot water.

Similar to dealing with individual tax audits, providing unasked-for information may give the auditor more questions to ask. The last thing that you want to happen is for the auditor to uncover more issues about your tax returns. IRS auditors won’t forgive tax debt or mistakes, so any admission that you may have will be used against you.

Be straightforward in replying to the questions. However, don’t manufacture excuses. IRS agents would know if you’re making any.

Also, don’t be antagonistic with the auditor. It would only make things worse for you and your business.

In order to avoid future audits, you should track bank transfers and other financial records aside from receipts. Anything that you cannot explain on the standard IRS form must be explained on paper. Of course, double-check all your calculations before filing your returns.

Aside from keeping proper documentation, you can avoid getting picked for an audit by deducting ordinary and necessary business expenses as allowed by the IRS. So even if your company is chosen for an audit, you have nothing to be afraid of.

Indeed, getting a letter from the IRS informing that you are to be audited can be very worrisome. But if you know how to deal with tax audits, then you don’t have anything to be afraid of. It also helps to have a tax professional guiding you to be assured that you can respond to whatever audit findings the IRS guys have with you or your business.