Tuesday, July 10, 2012

One Accountant's Perspective: Audit Questions

In recent conversations with several business owners, I was asked the same questions in varying forms. I have decided to address this in my blog since I believe it will help both new and current business owners.

How do I get out of an audit?
The truth is, there is no way out of an audit once you are in. Though it is easy to find the IRS intimidating once you discover you are being audited -- it’s one of the worst feelings to have in the world!   Here are three ways to go about addressing the issue.  Know what kind of audit it is -- there are three types of audits routinely performed by the IRS, and each has a different resolution:  letter, office, and “on-site”.

The least of these audits is the "Letter Audit" -- the IRS mails a letter to your home or business informing you that an audit is taking place. 

The Solution:  bring all of your records for verification by cross-referencing with other supporting documents. An example would be proving that you own the house by showing property taxes were paid on time and a mortgage payment stubs as supporting records.

The second type of audit is the "Office Audit" -- you are summoned to the IRS office to answer questions, review your financials, and anything else that might interest the IRS agent.  

The Solution:  hire an accountant (preferably with a Law Degree), but notice, I did not say Lawyer.  A CPA or good accountant would be your best defense in a situation such as this since they understand financial laws and can tell you what to divulge and what is not pertinent.  An accountant will be able to tie in evidence with supporting documents in a financial light. They will also have a much better understanding of the financial situation that the IRS agent is trying to dig into.

(The reason why you do not want a lawyer in this case is because a lawyer has knowledge in common and criminal laws, not financial laws. They can tell you when not to speak, but they cannot tell you which financial portion to omit. Thus, this is a situation where less is more.)

The last and most severe, is the "On-Site Audit" -- the IRS sends agents to your office to audit your financial information.

The Solution:  cooperate and hire an outside auditing firm to lend credibility to your financial information. An outside accounting firm has both its reputation, a list of clients, and dealing with the IRS. If they put their name after your financials, it will usually be sufficient to show that an audit is no longer necessary. Furthermore, you should consider hiring an Accountant to verify the IRS agent's numbers to ensure they are not tacking on more than they should -- just be sure to not use the same accounting firm that performed the audit to avoid any counter-argument of "conflict of interests".  Overall, the best way to avoid an audit by the IRS is to ensure you have accurate and supporting documentation. A paper trail, audit trail, invoices & receipts, and finally a good accountant are your best defense against an audit.  Which leads into the next question...

“What makes a good accountant?
There are many variables that go toward an accountant being "good" at their job.  Obviously,  knowledge, work ethics, and abilities to manage your financials accurately.  However, this does not make an accountant "good" it simply makes him/her "an accountant".

The trademark of a "good" accountant is their willingness to be your friend, consultant, and advisor. A good accountant will always volunteer their vast network of professionals for their clients to use to grow their business. An example would be an acquisition of a bank loan --the accountant should be able to give you a list of good bankers that they know and research a few more for you to pick from.
What separates individual accountants is their ability and willingness to not only work with you, but for you. An accountant that has a network but reserves it for themselves is as good as any other accountant. However, the instant they invite you to lunch to meet another professional that can help grow your business, you found yourself a good accountant.

Finally, the true mark of a good accountant is their selflessness in helping you, not themselves. An accountant that does not take your business because you cannot afford them is not good, they are just practical. But an accountant that tailors their service to meet your need with the confidence that they can be paid later -- because they can generate better cash flow and advise you in the right way -- are the ones you want to be with. The reason being, they are confident, willing to work with you, and have a vested interest in growing your business so they can grow their practice.
This leads me to the final question...

I've had my accountants for years.  (Why) Should I change accountants?
Yes, you should consider it. There is no such thing as a "stagnant" accountant, but there are such things an "overly-comfortable" accountants.  By that, I mean the accountant is more focused on maintaining their practices instead of growing your business. The accountant may become comfortable with an outdated system, no longer expanding their professional network, or miss out on a new cost saving technique being used in the industry by another accountant.

Thus, you should always entertain the notion of switching accountants for the pure reason that the younger accountants are ambitious, possess the latest knowledge, and willing to work to prove their worth.
Second, as a business owner, you should always be shopping for a better deal. Accounting is a black and white profession. That means an accountant's worth is purely in their ability to service you at the right price range, how extensive is their network, and how experience they are in your industry.

An accountant with forty years experience, but no network is worth less than an inexperienced accountant with a vast network. The reason being, the inexperienced accountant can gain the experience, with time, but they have the energy to maintain and grow their professional network -- which means, you as the business owner, have an unlimited source of professional talents to tap into for every sector of your business.
I would like to point out that, I am not encouraging you to go find the youngest accountant out there, but simply to be smart about it and keep an eye open. I would interview an accountant who is handing out business cards on the hottest summer day purely because he/she is determined and knows that the other accountants are most likely indoors with air conditioning. 

I hope this eases your audit anxiety and assists you in making the decision and finding the right accountant.
I wish you all the best.

Tran Nguyen, Accountant