IRS Audit Help: How to Prepare and Survive a Tax Audit
Has the IRS notified you that you’ve been selected for a tax audit?
No doubt, IRS audits are scary. The tax agency has a fearsome reputation — spurred on stories about threatening legal action and seizing properties if you don’t respond appropriately. Plus, the duration of the audit can be downright frightening.
It’s only natural to worry. But forget about worrying.
- What if you could prepare and quickly resolve the time-consuming and challenging IRS audit without communicating with IRS officials yourself?
- What if you could protect yourself, your rights, and your property and ensure that IRS workers treat you professionally during the audit period?
- What if you could appeal any disagreements with the IRS within the agency’s appeal system or through law courts to ensure your rights aren’t violated?
The IRS isn’t out there to get you but the money they think you owe them. If your tax returns have any mistakes, the IRS will likely find them and impose a penalty during the audit. However, that doesn’t mean you should fear the auditing process.
You can get a tax attorney to help you navigate the complex aspect of the audit, protect you and your rights, and help you resolve any issue with the IRS.
What Does An IRS Audit Entail
During IRS audits, the tax agency examines if you filled your taxes correctly and paid the proper tax amount for that year. The auditors check your financial records to ascertain that you followed the law.
If you play by the rule and follow the IRS’s instructions, you shouldn’t have any problem with the auditing process itself.
The government executes tax audits for various reasons, and it doesn’t mean you’re an automatic suspect of breaking tax laws when the IRS flags you for an audit. Sometimes tax audits are random to double-check your numbers and ensure you don’t have any discrepancies in your return.
However, you should understand what can raise red flags with the IRS.
Common Reasons the IRS Will Audit You
IRS audits are relatively rare. However, some factors raise red flags with the IRS, making your tax return more likely to be pulled out for examination, if not a full-blown audit.
While it’s impossible to fully inoculate yourself against audits — given that a portion of the audits is random — here are the five biggest red flags likely to land you on the IRS audit radar:
1. Mathematical Errors in Returns
Addition and subtraction errors can trigger IRS to flag your return for an audit, even if the mistake favors the tax agency. Math errors arouse suspicion of poor recording and estimating numbers from memory.
Errors in your returns attract huge fines, whether your mistake was intentional or unintentional.
If your math is shaky, you can use good tax preparation software to eliminate unfortunate errors that might flag you for the dreaded IRS audit.
2. Running a Cash-Heavy Business
Running a business that primarily deals with a lot of cash makes you more likely a candidate for an IRS audit. The tax agency has noted that cash-business owners tend to refrain from declaring some cash income, making them more susceptible to an audit.
Some of the cash-heavy organizations that the IRS aggressively targets include::
- Convenience store
- Laundromats
- Beauty salons
- Restaurants
- Car washes
If your business deals with a lot of cash, you should diligently keep meticulous records and report your income transactions.
Reporting high-volume cash transactions may also be scrutinized for tax crimes and other potential criminal activity.
3. Claiming Too Many Charitable Donations
Making significant contributions to charity makes you eligible for some tax deductions. When the donation is a substantial amount, it’s a common audit trigger.
You shouldn’t report donations without proper documentation to prove the validity of your contribution because it can raise some eyebrows and trigger an audit.
4. Having a Big Change in Income or Expense
If you reported a profit of $500,000 last year but only $50,000 this year, the IRS might get curious as to what happened. Similarly, the IRS will audit you if you show a huge profit increase from year to year.
But that doesn’t mean you shouldn’t make as much as possible. People have little control over income fluctuation, but you should be able to document why these changes occurred.
5. Filing Incomplete Returns
Even if your business gets a loss instead of a profit, you still must file tax returns. If your returns are missing or filed incomplete, the IRS will likely flag you for an audit.
Failure to file returns during the loss period and reappearing when the business gets traction will invite an explanation from the IRS. The best you can do is file the missing tax returns for the years you were supposed to file.
How Does The IRS Conduct Tax Audits
The IRS can conduct the audit by mail, where you mail in the documents the IRS asks for. Some of the documents the IRS asks for include the following:
- Income records
- Proof of expenses
- Proof of itemized deductions
Alternatively, the IRS can do in-person audits at your home, office, IRS office, or another field office. You can ask for an in-person audit if you feel the documents you have to mail are too many.
Whichever way the IRS conducts the audit, the tax agency will initiate contact with you through the mail with information on how they’ll conduct the audit.
What To Do If the IRS Comes Knocking on Your Door
Sometimes the IRS pulls out tax returns randomly for an audit regardless of what you did. While mitigating common audit triggers can prevent an audit from happening, having adequate documentation and records is the best measure for IRS audits.
You are less likely to make mistakes in the audit if you can easily and accurately reference your record. Here’s how you can be ready if the IRS comes knocking:
Step 1: Obtain the Requested Documents
When the IRS pulls aside your tax return for audit, they’ll send you a notice. You’ll probably receive Notice 566S, which enlists the records you must submit to the IRS for scrutiny.
The IRS requires you to keep documents for upto seven years to prove the deductions of the tax returns. You should have receipts for everything. If you didn’t keep all the documents, you have several options.
- You can contact anyone involved to recreate the document.
- Use the replacement documents to prove your expense.
The IRS also allows document recreation if a disaster ravages your original paperwork.
Step 2. Represent Yourself or Call a Tax Attorney
While you can represent yourself during an audit, it might not be in your best interest. The tax code is complicated, lengthy, and always changing.
A tax attorney can negotiate and advocate your position with the IRS — you won’t need to speak with the IRS during the audit period. Your attorney will complete Form 2848 to help you decipher any correspondence you receive, help you recreate missing records, and make you understand IRS questions.
Step 3: Resolve or Appeal Your Final Audit Outcome
After representation, if the result of your audit isn’t favorable, you can request a meeting with the IRS examination office to resolve any dispute about your audit. You can request an appeal hearing by filling out a written protest and then mailing it to IRS.
The IRS must receive the protest 30 days after the tax agency presents the audit findings to you. Appeal meetings are informal and might occur over the phone or in person.
If the agency can’t handle your appeal, you can proceed to a court of law.
How A Tax Attorney Can Help You With IRS Audit
The first task of a tax attorney is to help you understand the reason for your audit and gather all the information the IRS requests. Your attorney should walk you through the process with the minimum possible friction.
During the process, the lawyer will watch out to ensure your right as a taxpayer aren’t violated. The attorney will ensure the following:
- The IRS workers treat you professionally.
- The tax agency maintains your right to privacy and confidentiality regarding your tax matter.
- You understand the reason for the audit, how the IRS will use the information you provide, and what will happen if you fail to provide the requested information.
- You appeal any disagreement with the IRS in court or within the agency’s system of appeal.
If your right is violated in any way, the attorney can offer you the help you need with an IRS audit.
Resolve Your IRS Audit Quickly With A Tax Lawyer
Regardless of how complex your tax audit case might be, a tax lawyer can help you resolve it with your interest in mind. The attorney will cut the anxiety of receiving an IRS audit notice and help you handle the complex and time-consuming audit situation.
You’ll leverage the rich experience of professionals who have dealt with hundreds of IRS audit issues to resolve your tax liability quickly. We’ll help you understand all possible scenarios and offer you the best advice.
If you fall into tax liability, we can help you reduce tax interest and penalties. Schedule a tax action plan with us today to help you attain the best result for your tax audit.