Any normal person will probably panic if you receive notice of an IRS audit. Learn why you don’t need to panic, especially if you have filed correct and true tax returns.
Some people are audited because of discrepancies in their tax returns. However, every year, many people are just randomly selected to be audited.
Either way, the IRS representative should inform you why you are being audited.
What Does the IRS Need to Know?
If the IRS audits you due to discrepancies in your tax returns, it is because the numerical score of your tax returns falls below the average of each deduction you have made.
For example, each time you have a deduction that is significantly above or below average, the numerical score of your tax return goes up, and the likelihood of being selected for an audit increases.
The areas that are typically considered red flags are:
- Low profit margins
- High costs of travel and entertainment allowances
- Deductions on your tax returns that exceed the IRS targets
- Complex business expenses
- There are money tips involved in your business
- Large contributions to charities
These are just some of the areas IRS may be interested in. Others may be found at www.wwwebtax.com.
Types of IRS Audits
There are different types of audits conducted by the IRS described below:
A correspondence audit is where you receive a letter from the IRS requesting you to prepare and supply them with copies of returned receipts or canceled checks in order for them to clarify several deductions from your returns. This method usually targets small and simple tax returns.
An office audit is where mail is sent to you identifying certain item discrepancies that require you or your representative to prepare and take the required documents to the IRS offices nearby for verification. This audit usually targets sole proprietorship businesses with sales below $500,000.
A field audit is where the IRS agents call the owner(s) of a business to notify them of certain discrepancies in their returns which require the agents to conduct the audit at their place of work. This method usually targets partnerships and corporations.
Taxpayer Compliance Audit
Th is type of audit is randomly conducted to upgrade the numerical score program. It requires all returns to be substantiated via documentation and therefore all checks, invoices, bank statements and contracts for all deductions need to be prepared and submitted.
Preparing For a Field Audit
If you are selected for a field audit, you should consider getting representation. There are no perfect tax returns and it is the job of the field agent to ask questions that may lead them to areas where you are more vulnerable. A representative will be able to buffer and protect you from expanding the scope of the audit.
In the telephone conversation the agent will ask you to prepare the following:
- The heads of the organization for an interview
- A date(s) for the auditing to take place
- The location of the records for easy access
- A list of all the records that must be available
How to Make the Auditing Process as Smooth as Possible
The auditing process may be quite strenuous because it involves a lot of questions, and preparing and providing a lot of paperwork and documentation.
Here are some few tips that can help you have a smoother audit:
Once you have received communication from the IRS you need to get in touch with their offices in order to understand what exactly they are looking for.
This conversation will also enable one to provide the required documents.
It will also provide you organize your documents and remove any that are not required (and may lead to further questions).
Preparing early will also help you identify documents that are missing. That will give you enough time to locate them or to get copies from other sources.
Other tips to consider:
- Give the right amount of information for questions asked; not too little or too much
- Provide only the documents needed to support the deduction in question
- Strive to answer the questions honestly
- One should carry duplicates, not the original records
- Stay out of casual conversations with the auditor
- Stay calm and avoid arguments
- Consult with a representative before signing any documents and also try to obtain copies of the signed documents