You’re Being Audited – Now What???

Few words strike terror in a business owner’s heart like the word “audit.”

Recently, a client of mine was notified about discrepancies in their state tax filing…from 2018. Yes, 5 years after filing, the notice came. Most IRS audits happen within 3 years, but states have different rules and regardless of where you live and do business, you need to be prepared and have your books in order to handle this situation with as little stress as possible. 

Don’t Panic

So, what do you do if you get this kind of notice? First, try not to panic too much. Yes, easier said than done, but if you have solid bookkeeping practices, your process will be much easier to deal with than if you didn’t.  

Contact Your Tax Accountant

You will want to contact your tax accountant that filed the tax return in question to start the investigation – and that is exactly what this is, an investigation. Try to look at the situation as a mystery to solve versus an impending attack or punishment. Somewhere, a mistake was made, and you are now in the process of finding it so that it can be fixed. Your tax accountant should serve as your chief investigator as they should have the critical information to determine where the issue occurred.

Review Your Numbers

In this case, the issue was with the amount of income reported in New Mexico and the Gross Receipts Taxes paid. This client works in multiple states and reports the income generated in each state separately, so there was a good chance that there was a discrepancy in where the income was reported. The only way to be certain is to review and compare all the information that went into the tax return for the year in question: income, expenses, GRT paid, review receipts and allocations, etc. This is not a quick process, but your tax accountant and your bookkeeper should be working together with you to review all the information.    

Consider a Managed Audit

You can partner with the NM Taxation and Revenue department for a managed audit, which is a variation of a traditional field audit. In a managed audit, you and your team conduct the audit on yourself with oversight and agreement with the Secretary or the Secretary’s delegate.

Benefits of a Managed Audit

The main benefit of a managed audit is the ability to avoid penalties and interest. Per NM Tax & Revenue, “The managed audit program allows a taxpayer to disclose tax due and avoid paying penalty and interest, provided the assessment is paid within 180 days from the assessment date. If the assessment is not paid in full within 180 days, interest will be assessed on any remaining tax due from the time that tax was originally due until it is paid.”

In my client’s case, she was looking at a 5-figure sum in underpayments and fees, so a managed audit was a beneficial option for her.  

Managed Audit Options

While there some qualification requirements for a managed audit, NM Tax & Revenue offers a couple of options to consider: 

Option A

The taxpayer will prepare the audit work papers with minimum guidance from the Department. The taxpayer will be issued a written statement from the Department stating that the taxpayer may remain subject to audit by the Department for the audit period.

Option B 

The taxpayer will work with an assigned auditor to develop an audit plan, provide all records required to complete the audit, after completion and acceptance of the audit the taxpayer will be issued a written statement from the Department stating that the specific issue(s) in the audit period covered by the agreement are closed to further audit by the Department.

Prevention & Preparation

While audits are never really on anyone’s list of fun things to do, it doesn’t have to be so scary. We are all human and mistakes happen. We can only do our best to prevent the stress by being prepared and following these practices:  

  • keep good records – your bookkeeping and accounting practices are critical here. Make sure the information you are entering is accurate, thorough, and reviewed regularly. This step will go far in preventing audits and be your biggest asset if you ever are audited.  
  • keep files for 7 years – while most audits will happen sooner than this, the IRS can elect to go back through seven years of your records.
  • have a reliable accounting team – your bookkeeper and tax accountant are vital in keeping your numbers and your tax returns accurate and timely. Review your agreements with each to make sure audit assistance is included in your contracts. Unfortunately, my client changed tax accountants recently and the accountant that filed the returns for the year in question is not involved in the audit process. While her new accountant is taking the lead on the audit, the process is taking longer as they are trying to piece together the actions of the original accountant.

Audits are often viewed as scary situations. If you have solid accounting practices and a strong accounting team, you will be able to manage the situation better than you likely realize. If you need assistance in setting up your accounting practices, we’d be happy to assist. Contact us at 505-850-3908 or at

For more information on the managed audit process in New Mexico, visit the NM Tax and Revenue website at