Welcome to “How to Prepare for an IRS Audit”
The Internal Revenue Service (IRS) frequently carries out audits. Although an IRS audit normally has a bad reputation, the fact that it has been designated as such is not a guarantee of any wrongdoing.
Even though the likelihood of an audit is rather low, they do occasionally occur. We include some advice on how to respond to one should it occur, to help you get ready for one.
Defining An IRS Audit
To make sure you are adhering to tax regulations and submitting the right amount of tax, the IRS will examine your accounts and financial information. The IRS performs audits over the mail, referred to as a correspondence audit, or by an in-person interview to examine your documents.
The interview may take place in the taxpayer’s home, place of business, or accountant’s office, or at a nearby IRS office.
Taxpayers should be aware that an audit in no way suggests that there may have been illegal behavior. Tax returns are intricate papers that include financial information that has to be examined to ensure correctness.
The audit procedure, also known as an examination, does not suggest that you made a mistake on purpose. In actuality, the IRS gets in touch with people for a variety of reasons.
According to the IRS, taxpayers are picked using a “random selection and computer screening” procedure that is based on a statistical calculation. Tax returns are compared by the IRS to “norms” for comparable returns. If your return deviates from the “norms,” an audit may be requested of you.
You could also be audited if your tax file contains transactions with other taxpayers, such as business partners or investors, and they were audited. Other considerations, such as income reported or odd deductions, are used to select some returns.
How to Prepare for an IRS Audit
Keep cool and realize that the analysis is a professional process that may be handled by only producing the appropriate documentation if you do receive the dreaded audit notice from the IRS. Knowing what to anticipate will help you deal with mistakes quickly, handle numerical disparities, interact with IRS employees politely, and complete the process with just mild stress.
Audits may be challenging, laborious, and time-consuming. A typical business audit takes a full year to complete. Being well-prepared, though, may be really beneficial. To aid you in the process, we have selected some of our greatest advice.
Consult a Tax Professional
You should talk with or employ a competent tax professional as soon as you get the IRS audit notification. In a perfect world, you would seek out an enrolled agent, a CPA, or an attorney. The IRS will allow professionals with these precise certifications to represent you.
Even if you prefer to manage things yourself, it is strongly advised that you at the very least speak with a tax professional.
A straightforward IRS letter demanding particular documents might be a warning indication of future problems. It is essential to evaluate the request and any additional IRS contact with a person who can assist you in developing a response.
Additionally, it is advantageous to have your tax preparer and bookkeeper on hand. They may respond to inquiries immediately, which speeds up the audit procedure.
Organize Your Records
Penalties might result from poor records. As a result, meticulous organization is essential to the audit process. The income, losses, expenses, and deductions shown on your tax return should be supported by proof. Make all pertinent records available and arrange these documents according to year and kind (such as income, spending, pension plans, etc.).
If necessary, you should also get vendor documents and information on your bank or credit card transactions. Do not make up records if they are not readily available!
Make every attempt to recreate lost or destroyed documents as well as a record of your efforts. Document your efforts to recreate such files, for instance, if a fire or flood ruined your office’s business records.
Check your records carefully to be sure there are no personal costs listed in the ones related to your business. Separating personal and corporate spending is essential. Use separate credit cards, bank accounts, and travel bills for work and personal trips to accomplish this.
Utilize An IRS Audit Technique Guide
ATGs are used by the IRS to help firms in a variety of unusual sectors be ready for audits. The guidelines include information on different sectors or problems, commonly used accounting techniques, how revenue is obtained, and places where taxpayers might not be in compliance.
ATGs often target particular businesses or sectors. ATGs are available, for instance, in the fields of construction, child care, and veterinary treatment. Other recommendations cover topics like executive salary, losses from passive activities, and capitalization of physical property that regularly come up during audits.
The same information is available to your company, and you can utilize it to learn more about what the IRS is seeking in terms of legal and regulatory compliance. ATGs are designed to make it easier for IRS inspectors to spot typical strategies for concealing income and inflating deductions. To make sure you are not engaged in any actions that raise concerns, your company may use the same information.
Go In Well Prepared for the Audit
You are informed of the year in question and your audit date by the IRS well in advance of that day. This gives you plenty of time to carefully compile and arrange your records. Additionally, it’s a good idea to single out the problematic year and make sure your auditor can quickly access the relevant financial data.
Being prepared and being professional can help your audit process go more smoothly and quickly. You can accomplish this without spending any money. It would be helpful if you show courtesy, be on time for appointments, dress appropriately, and reply to demands for information or documents.
How Long Can an IRS Audit Take?
The intricacy of the issues, the fast supply of the desired material, the availability of both parties to meet as necessary, the style of audit (e.g., correspondence vs. field), and whether you concur or disagree with the audit conclusions all affect how long an audit takes.
Gather as much information as you can ahead of time, attempt to react to requests as soon as possible, and make yourself accessible for meetings and inquiries to speed up the audit.
Be ready for weeks, months, and in some circumstances, years, of communication, appointments, and follow-ups since audits can take a while. But bear in mind that, if your case doesn’t qualify for any exclusions, the IRS typically only has three years to finish its audit.
What Will Happen During the Audit?
You’ll be required to provide particular documentation during the audit to prove the income, credits, or deductions you listed on your return. You would have utilized each of these records to create your return, according to the IRS.
As a result, you shouldn’t have to make anything new in order to fulfill the request. That makes the procedure seem straightforward, but to assist you, bear the following advice in mind:
Just the evidence required to prove your claim should be provided. Never provide the auditor with further information. Remain kind, helpful, and composed. Avoid becoming confrontational, defiant, or aggressive despite your frustration.
Just respond to the inquiries made. Give concise responses and always be truthful and succinct in your responses. Make a note of a question you’re not sure how to answer and offer to go back to the customer service representative with the information.
Pertain to Publication 1, Your Rights as a Taxpayer that further clarify your rights in addition to the examination, appeal, collection, and refund processes and your right to courteous treatment from IRS agents, if you believe you are being treated unfairly or have questions about why specific information is being requested.
IRS Red Flags
Make sure you thoroughly check your figures before you put pen to paper or click “submit” to avoid drawing the IRS’s notice. Consult a tax professional or attorney for guidance if you have any complex queries regarding new tax regulations, how to record various sources of income, or what deductions you are permitted to claim.
Your risks of getting audited may be decreased if you use a qualified, respected individual or business to prepare your taxes. They can make sure your return is submitted honestly and properly, and they are also aware of the typical red flags the IRS looks for.
Keep in mind that only a very tiny percentage of tax returns are audited, and that not all audits — particularly the correspondence audits — are challenging or unpleasant. Sometimes all that is necessary is to keep hold of crucial records until the IRS asks for the information.
What Happens After the Audit
The examiner will provide you a computer-generated audit report after the interview that includes the amount of additional tax assessed, an explanation of how your return will be altered, choices for how to appeal the report, and an area to indicate whether you agree or disagree. By signing the report, you renounce your right to file a tax court case.
You are not required to sign the report if you are not sure that you concur with it. To further examine the documentation, you might ask to talk with the agent’s supervisor. Following this, you can file an appeal, get help from the Taxpayer Advocate Service, and, if required, proceed to court.
If you have any questions regarding “How to Prepare for an IRS Audit”, please leave a comment or contact us to make an appointment.
Also read: 5 Deductions to Look Out for in 2023
