Facing an IRS audit can be a daunting experience for individuals and businesses alike. The Internal Revenue Service (IRS) retains the authority to review tax returns and ensure compliance with tax laws. However, understanding the audit process and having proper guidance can help safeguard your tax position.
In this article, we will demystify the IRS audit process, shed light on the steps involved, and discuss how you can navigate this complex procedure while protecting your rights and minimizing potential penalties.
The Purpose and Triggers of an IRS Audit
The IRS will conduct an audit to verify the accuracy of tax returns and ensure compliance with taxation laws. Some of the factors that can trigger an audit include the following;
Failing to report some income: You are likely to get audited if you fail to report all your income sources. For example, if you are a waitress, but you earn a little cash on the side as a freelance writer, you may report the earnings from your waitressing job on a W-2 form, but neglect to submit a Form 1099 for the freelancing income.
Math Errors: You may also get audited if the math on your tax returns doesn’t quite add up. Double-check the math and make sure everything lines up as it should before submitting. You can use tax preparation software if you don’t quite trust yourself to avoid simple computation errors.
Claiming too many charity donations: Charitable donations are always eligible for deductions, but do not report false donations. Only report donations that you can prove with relevant and valid documentation.
Too many losses on a Schedule C: Self-employed individuals may be tempted to file personal expenses as business expenses. But too many losses reported can cause the IRS to question just how your business is staying afloat, triggering an audit.
Claiming a home office deduction: The IRS identifies home office deductions as reserved only for people who use part of their home “exclusively and regularly for trade or business.” Claiming a home office deduction when you don’t have a home office can be flagged as fraudulent and trigger an audit.
Deducting Too Many Business Expenses: Just like reporting too many losses, reporting too many expenses can trigger an audit. When reporting business expenses, make sure the purchase was both common and accepted in the trade or business and it helped run the business. For example, a painter may report paint and brushes as a business expense.
How You Will Know You’re Being Audited
If you are being audited, the IRS will typically notify you by mail. The notification will often specify the kind of audit being conducted and the documents and records that you need to provide. It is crucial to respond promptly and thoroughly, as failing to cooperate can escalate the situation.
Seek Professional Representation
One of the things you can do when you receive this notification of an Audit from the IRS is to engage the services of a reputable attorney. It is important to choose an attorney who specializes in tax matters as they will be better placed to offer you the necessary assistance. An experienced attorney will be invaluable to you during the audit as they can help you navigate the rights you have, and how to protect yourself as well as offer you expert advice through every stage of the process.
How to Prepare for the Audit
Even if you do get a tax attorney to guide you through the process, there are still some things that you will have to do to prepare for the audit. The first and most important is gathering and organizing all the documents the IRS has requested. These documents may include but are not limited to, tax returns, supporting documentation, receipts, and financial statements. Providing all necessary and relevant documentation will help substantiate the accuracy of your reported income and deductions.
Conduct a Pre-Audit Review
Now that you have all the documents the IRS has requested, you don’t need to wait for the auditor to conduct a review. You will benefit from a pre-audit review that your lawyer should be able to facilitate. Think of this review as a rehearsal for the IRS auditor. And just like every rehearsal, it is meant to help you identify areas of concern and potential issues that may require further explanation or clarification during the audit. This review process is the primary reason for hiring a tax attorney as you may not be able to identify these issues on your own.
Meeting with the IRS Auditor
With a pre-audit review done, you will be prepared for the actual event. During the audit, you or your attorney will meet with the IRS auditor to discuss the specific issues being reviewed. It is crucial to approach this meeting professionally and to provide clear and concise explanations for any questions raised. Having competent legal representation can help navigate complex tax matters effectively.
Responding to the Audit’s Findings
After the audit, the IRS will communicate its findings, which may include adjustments to your tax return. If there are steps that you can implement to remedy the situation, your lawyer should be able to guide you through the steps to take.
If you however disagree with these findings, you have the right to challenge them through an appeal or negotiation process. Your attorney will guide you in formulating a strong response based on the facts and applicable tax laws.
How to Minimize Potential Penalties
Proactively addressing any identified issues during the audit can help minimize potential penalties. By cooperating with the IRS, providing accurate information, and working with your attorney to resolve discrepancies, you can demonstrate your commitment to compliance and potentially avoid harsh penalties or legal consequences.
Conclusion
Facing an IRS audit can be a stressful experience. By understanding the audit process, seeking appropriate legal representation, and preparing meticulously, you can navigate the complexities of an audit with confidence. Remember to be responsive, cooperative, and transparent throughout the process, and take the necessary steps to protect your rights. With the support of skilled attorneys, you can present your case effectively and achieve a fair outcome while safeguarding your financial well-being.
This article was written in cooperation with Algo Hackers