What To Do If You Get Audited
Tax season is a fraught time for taxpayers, who are understandably eager to get their refunds as quickly as possible. But some individuals and businesses may also find themselves facing audits, and knowing what steps to take in that event can make the process less painful.
The Internal Revenue Service says that it audits less than 1% of all tax returns, but that number may go up in the coming years.
The IRS is hiring thousands of new auditors to handle this expected audit increase as the federal government seeks to recover revenue lost due to tax evasion by businesses and individuals. In particular, the IRS has announced that it will increase its scrutiny on self-employed individuals, home-based businesses, and small business owners.
So if you are facing an audit, what should you do? Here’s everything you need to know if you find yourself in the unlucky position of being selected for an audit:
What is an IRS Audit?
An audit is an examination of your tax return by the IRS to ensure that you have reported your income and expenses accurately.
The IRS can select your return for an audit randomly or because something on your return has raised a red flag. For instance, if you claim a lot of deductions relative to your income, that may trigger an audit.
The good news?
Many times, being audited doesn’t necessarily mean there’s a problem. The IRS may simply want to verify that you haven’t made any mistakes or left anything out. In fact, sometimes, you may even get a refund as a result of an audit!
Why Have I Been Selected For An IRS Audit?
Sometimes, the IRS uses random selection and computer screening to select returns for audit. Other times, your return may be selected if it omits information or contains math errors.
There are, however, some red flags that are more likely to trigger an audit, especially for sole proprietors and small business owners. Here are a number of potential triggers.
Not reporting all of your income
This is perhaps the easiest way to raise a red flag with the IRS. If you receive money or property during the year and don’t report it on your return, the IRS will likely take notice.
Claiming excessive deductions
If your deductions are significantly higher than those of other taxpayers in your industry or with a similar income level, you may be more likely to get audited.
Note: Another potential trigger is improperly filing for certain credit programs (like the R&D or ERC credits).
Not reporting all of your expenses
If you have business-related expenses that are reimbursed by your employer and not included on your W-2, or if you have personal expenses that you claim as business deductions, this can attract IRS attention as well.
Run a cash-heavy business
If you run a business that deals mainly in cash, such as a restaurant or retail store, you may be more likely to get audited. The IRS knows that it’s easy for businesses that deal mainly in cash to under-report their income, so they tend to scrutinize these businesses more carefully.
Take the home office deduction
Claiming a home office deduction can also increase your chances of being audited because it’s easy to abuse this deduction. The IRS has strict rules about what expenses can be included in the home office deduction, and if you don’t follow them carefully, you may raise a red flag.
Lose money consistently
If you’ve been reporting losses year after year, that may also trigger an audit. The IRS may want to make sure that you’re not using your business losses to shelter other income or that you’re not operating a hobby masquerading as a business.
Mix business and personal expenses
If you claim business deductions for items that are clearly personal, such as clothing or entertainment expenses, expect to get some questions from the IRS. To successfully deduct your business expenses, they must be reasonable and directly related to your business.
Types of Examinations
If you find yourself under audit, the first step is not to panic. The IRS will notify you by mail and provide information on what type of audit you’re facing and why your return was selected. There are three main types of audits: correspondence audits, office audits, and field audits.
Correspondence audit
Correspondence audits are typically the easiest, as you can generally handle them by mail. The IRS will send you a letter with questions or documentation requests. Depending on your answers and supporting documentation, the IRS may not need to examine your return further.
Office IRS audits
A more typical audit is an office audit, in which the IRS examines some or all of your tax records in person at its offices. This could involve you sending photocopies of documents to the IRS, or a face-to-face meeting with an auditor. These are often conducted at larger companies that have been selected for a comprehensive review.
Field IRS audits
The most thorough audits conducted by IRS agents at your home or place of business are called field audits. Field audits are rare and usually only happen when an auditor suspects you’ve underreported your income by 25% or more.
As with office audits, you’ll likely be required to turn over your records and answer questions. The good news is that field audits can be resolved more quickly than office audits, as the IRS only has a finite amount of time before it must complete an audit.
What Will The IRS Audit Involve?
The first step in an audit is usually a letter (notice) from the IRS informing you that your return has been selected for examination. The letter will specify what documents and records the IRS want you to provide, and how and where you should submit them. You will typically have 30 days to respond.
What to Do If You Receive an Audit Notice
If you receive a notice from the IRS that you’re being audited, you should get in touch with your tax professional right away. They can help you understand the scope of the audit and guide you through any necessary documentation or other steps.
Follow these steps to make the process as smooth and painless as possible:
1. Collect all your documentation
The IRS will request specific documentation to support the items on your return, so it’s important to have all of your supporting documents readily available. This includes everything from your original tax return to receipts, canceled checks, and bank statements. The more documentation you have, the better.
2. Respond to the IRS promptly
You should respond to any correspondence from the IRS within 30 days. If you need more time, you can request an extension.
3. Be honest and thorough
Don’t try to hide any income or assets, as this will only make the audit more complicated and time-consuming. Answer all questions thoroughly and provide supporting documentation when requested.
4. Work with your tax professional
Your tax professional can help you prepare for the audit ahead of time, answering any questions you have and ensuring you have all the documentation you need.
Work with Tri-Merit for Tax Controversy
Receiving an audit notice from the IRS can be daunting. Not only that, the IRS audit process can be complicated, time-consuming, and also expensive if you are not well-prepared. But really, it doesn’t need to be that way.
We offer comprehensive audit representation and tax resolution services to help you minimize the impact of an IRS audit and resolve any tax issues. Whether you are facing an office audit, field audit, or correspondence audit, our team of experienced tax professionals can help you.
Contact Tri-Merit today if you have questions about the audit process or need help responding to an audit notice from the IRS and are looking for expert audit representation. Our tax professionals are standing by to help you navigate this stressful time and achieve the best possible outcome for your situation.