You open the mail and see it: IRS or New Jersey Division of Taxation. Your first reaction may be panic. Your second reaction may be: “Screw this. I’m not dealing with it.”

Maybe you put the notice on your desk. Maybe you tell yourself you will deal with it next week. Maybe you sold or closed the business and think the audit no longer matters.

But here is what every New Jersey business owner needs to understand:

The government does not need you to participate in order to finish the audit. But without you – or someone representing you – it may finish the audit without hearing your side.

What Happens If I Don’t Respond to a Tax Audit?

Ignoring an audit does not stop the audit. The IRS or NJ Division of Taxation may continue using the information available to it.

The problem is that the government’s information may tell only part of the story. For example, bank records may show deposits without explaining that some were transfers between accounts, loans, or other non-taxable transactions. The government may see money paid to workers but not have the documentation necessary to establish legitimate business expenses. It may see gross receipts without having records establishing returns, allowances, exemptions, or other adjustments.

When you leave an empty chair at the audit, you also leave no one there to explain your side.

Can New Jersey Make an Assessment Without My Records?

Potentially, yes.

A New Jersey business is required to maintain adequate books and records. When those records are missing, incomplete, or not produced during an audit, the Division of Taxation may use available information and alternative audit methods to determine what it believes the business owes.

That can be particularly dangerous in a sales tax audit.

The auditor may attempt to reconstruct sales using bank deposits, purchase records, industry information, markups, sampling, or other available evidence depending on the circumstances.

That reconstructed number may look very different from what the New Jersey business owner believes actually happened.

This is why “I don’t have all the records” is not a reason to ignore the audit.

It is a reason to develop a strategy for dealing with the missing records.

What If My Business Records Are a Mess?

This is one of the most common reasons a business owner avoids responding.

You may be thinking:

“I don’t have everything they’re asking for, so what am I supposed to give them?”

Do not disappear.

Small businesses do not always have perfect records. Missing records create a problem that needs to be addressed strategically, but they do not necessarily mean you should simply accept whatever the auditor proposes.

Depending on the circumstances, information may be reconstructed from bank statements, credit-card processing reports, QuickBooks or other accounting records, invoices, vendor records, tax returns, payroll records, third-party documents, and other available evidence.

The question becomes:

What happened, and what can we prove?

What If I Sold or Closed My New Jersey Business?

You still need to deal with the audit.

“I sold the business” and “I closed the business” are not responses to an audit notice.

An audit generally concerns what happened during the period when the business was operating.

Selling the business later does not necessarily eliminate tax liabilities from the years you owned it.

Closing the doors does not erase them either.

Depending on the type of tax and the circumstances, certain business tax liabilities may also create potential personal exposure for responsible individuals.

A New Jersey business owner who throws away the audit notice because the company is no longer operating could eventually discover that the problem did not disappear with the business.

Can an Audit Become Bigger Than the Issue That Started It?

Yes.

This is another reason New Jersey business owners should take audit notices seriously.

An audit may begin with one issue and uncover another.

A sales tax audit may raise questions about reported gross receipts.

A payroll tax audit may uncover withholding or worker-classification problems.

Bank deposits may raise income tax questions.

Payments to workers without proper reporting may create additional issues.

And when the facts are particularly serious, evidence suggesting intentional fraud or tax evasion can create consequences far beyond an ordinary civil audit.

That does not mean every mistake becomes a criminal case.

It means you should understand what is in your records before blindly producing them.

Should I Just Give the Auditor Everything?

Cooperation does not mean dumping an electronic folder containing thousands of documents on an auditor without reviewing it first.

Before documents are produced, someone should understand:

• What did the auditor actually request?
• What documents respond to that request?
• Are the records complete?
• What do those records show?
• Are there obvious discrepancies that need to be understood?
• Is the request broader than necessary?
• Are additional explanations or supporting records needed?

The goal is not to hide information.

The goal is to handle the audit correctly.

Why Does Experienced Tax Audit Representation Matter?

A tax audit is not simply a document-production exercise.

The representative needs to understand the tax issue, the audit process, the records, and what the auditor is trying to establish.

We have seen firsthand what can happen when that does not occur.

One business owner we represented operated a trucking and delivery company generating approximately $5 million per year.

Workers had been paid in cash. 1099s had not been properly issued. The owner did not have an ongoing legal or tax advisor helping him structure and monitor the business. He essentially went to an accountant once a year to have the tax returns prepared.

When the audit arose, he had his local general-practice attorney handle it.

The resulting assessment was approximately $6 million.

We became involved at the appeal stage.

After analyzing the audit and challenging the assessment, it was reduced to a little over $1 million.

One million dollars was still a very serious tax problem.

But there is an enormous difference between approximately $6 million and a little over $1 million.

The lesson is not simply that you need a lawyer.

You need someone who understands the type of tax audit you are facing.

What Shouldn’t I Do After Receiving an Audit Notice?

There are several mistakes that can make an already difficult situation worse:

1. Don’t ignore the notice.
2. Don’t miss the response or appeal deadlines.
3. Don’t destroy or alter records.
4. Don’t manufacture documents to replace records that don’t exist.
5. Don’t send a massive unreviewed document dump without understanding what you are producing.

And don’t assume that because you already made one of these mistakes, it is now too late to get help.

What If I Already Ignored the Audit?

Deal with it now.

Maybe the first notice has been sitting on your desk for three weeks.

Maybe you missed an auditor’s deadline.

Maybe you received additional notices and stopped opening the envelopes.

Maybe an assessment has already been issued.

Do not assume there is nothing left to do.

Depending on where the case stands, there may still be opportunities to respond, challenge a proposed assessment, pursue an administrative appeal, petition the appropriate court, seek IRS audit reconsideration where available, or deal with the resulting liability through tax-resolution procedures.

But options can disappear as deadlines pass.

Yesterday may have been the best day to deal with the audit. Today is the next best day.

Frequently Asked Questions About IRS and New Jersey Tax Audits

Can New Jersey audit a business that has closed?

Yes. Closing a business does not necessarily prevent New Jersey from examining tax periods when the business was operating or pursuing liabilities resulting from those periods.

What happens if I don’t have records for a New Jersey sales tax audit?

Do not ignore the audit. Missing or inadequate records can cause the auditor to use other information and audit methods to determine the business’s taxable sales and potential liability. A tax professional may also be able to identify other reliable records that help establish what actually occurred.

Can New Jersey estimate my sales if I don’t respond?

When adequate records are unavailable, the Division of Taxation may use available information and appropriate audit methods to determine tax liability. That is one reason failing to participate can put the business owner at a significant disadvantage.

Can I appeal a New Jersey tax audit assessment?

There are procedures for challenging New Jersey tax assessments, but deadlines matter. The notice you receive should be reviewed immediately to determine the applicable deadline and available appeal rights.

What happens if I miss an IRS audit deadline?

It depends on which deadline was missed and where the case is in the process. Missing one deadline does not necessarily mean every option is gone, but certain rights can be lost if statutory deadlines expire. Get the notices reviewed promptly.

Should I talk directly to the auditor?

You can, but you do not necessarily have to handle a significant tax audit by yourself. Depending on the matter and the professional involved, an authorized representative may be able to communicate with the IRS or New Jersey Division of Taxation on your behalf.

The Bottom Line

If you are a New Jersey business owner who received an IRS or NJ Division of Taxation audit notice, do not confuse silence with a defense.

The government does not need you to participate to keep the process moving.

But if nobody is there presenting your records, explaining what happened, challenging incorrect assumptions, and protecting your appeal rights, the government may make its decisions without hearing your side.

Do not panic. But do not ignore it.

At Tomes Law Firm, we represent individuals and New Jersey businesses facing IRS and New Jersey tax audits, including sales tax, payroll tax, income tax, worker-classification, and other business tax examinations. If you received an audit notice – or already ignored one – call 732-333-0681 or 833-4IRS-TAX, or visit tomeslaw.com. We Solve Tax Problems. You Get Peace of Mind.