Paying taxes and filing tax returns for yourself or business is never a pleasant experience. Only when you’re receiving a refund makes the dreadful year-long experience worthwhile. Knowing that you have certain eligible deductions may tempt you to claim more than what you have or hiding small miscellaneous 1099 forms might fly under the radar to you but tempting to short Uncle Sam might do you more harm than good. This practice could result in an IRS Audit that could put you, your family, or business in a very tough spot.
What exactly is an IRS Audit?
As per the IRS, an IRS audit is a review or examination of an organization's or individual's accounts and financial information to ensure information is being reported correctly, according to the tax laws, to verify the amount of tax reported is substantially correct. Now, an IRS audit doesn’t necessarily mean you’ve done something wrong. You could be selected by random or by related examination which means you could be audited because of issues with a business partner or investor’s tax return that you might have a close relationship with. The point to remember is to always be honest and report all income-related items and expenses truthfully.
If you’re audited, how will the IRS contact you?
In this day in age, it seems like there’s an overabundant supply of scammers out there. If you are going to be selected for examination the IRS will notify you either by mail or telephone. If you receive a phone call they’ll follow up with a letter confirming the audit. Always remember that the IRS will never e-mail or reach out to you via text message to inform you of this news. If by chance you are contacted in either of these false methods, it would be best to contact your local authorities to report the issue.
Once contact has been made they’ll either schedule a face-to-face meeting either at your home, place of business, accountant’s office, IRS office, or contact the audit by mail.
What should I do if I receive the dreadful letter or phone call from the IRS?
First things first, do not panic or assume you’ve done something wrong. Read the letter over carefully and understand what the IRS has requested. Sometimes clarification might only be needed. An important point to remember is that the IRS will be auditing a portion of your tax return- not the entire form.
Once you’ve read the letter over carefully you should contact your accountant, who might also be a Certified Public Accountant (CPA) or bookkeeper who helped prepare your tax return. Let them help guide you through the process. These professionals not only helped prepare your return they’ve also been in similar situations like yours before, so you won’t be alone.
What if I filed my own tax return, what should I do?
According to Go Banking Rates, 34.5% of tax filers prefer to file their tax returns using a digital tax preparation tool such as TurboTax. If you are audited using a product such as TurboTax or H&R Block then it’s best to contact their customer service department right away to advise them of the issue. Their products normally offer some kind of audit assurance so they’ll be able to guide you throughout this process and provide you recommendations.
An important point to make, if you filed electronically using tax preparation software it is still highly recommended to contact your local CPA, tax preparer, or bookkeeper to help you with this issue! After all, financial livelihood could be at stake.
How can I increase my chances for a smooth, pleasant experience with the IRS?
Any tax professional such as a licensed CPA, accountant, or tax attorney will provide you with two very important tips: prepare yourself with all documents relevant to the item(s) being audited and comply with their every request. A lack of support for the audited items could result in additional questioning and looking at previously filed returns to see if such items as charitable donations that were claimed previously seem reasonable now if claimed and audited. Noncompliance will only further delay the audit and make it even more painful for you.
A common misconception
Even though items such as charitable contributions, exemptions, and self-employment income and expenses might sometimes be a red flag to the IRS it doesn’t mean they can’t be claimed. Sandy Zinman, tax committee chairman for the National Conference of CPA Practitioners indicates there are no automatic triggers for an audit. If your tax return grossly stands out among similar returns or there was a drastic change from the prior to the current year such as an individual experiences a significant financial hardship losing a high income job or valuable assets.
Remember, if you have legitimate and reasonable business expenses, receipts for charitable donations then claim them as allowed by your living and income situation.
Important points to remember about an IRS Audit: the Statute of Limitations
Here are a couple of tips to remember about when the IRS can audit your tax return and how long you should keep your tax information accessible:
- 3 Years from the due date of the return or the date on which it was filed, whichever is later (This period applies to simple mistakes).
- 6 Years from the due date of the return or the date on which it was filed, whichever is later (Meaning 25% or more of your Adjusted Gross Income (AGI) was omitted from your tax return).
- Forever if you fail to file or commit fraud