Being Prepared For An IRS Audit

The IRS recently announced it intends to hire thousands of new employees as part of a tax-enforcement push. This could mean an uptick in audits sometime soon, likely focused on wealthier individuals and business owners. (Some tax returns are chosen randomly as well.)

The best way to survive an IRS audit is to prepare for one in advance. On an ongoing basis, you should systematically maintain documentation — invoices, bills, canceled checks, receipts and other proof — for the items that you report on your tax return. Maintain and back up these records safely. With that said, it also helps to know what might catch the tax agency’s attention.

Audit hot spots

Certain types of tax-return entries are known to the IRS to involve inaccuracies leading to an audit. One example is significant inconsistencies between tax returns filed in the past and your most current tax return. If you miscalculate deductions or try to claim unusually high ones, your return could be flagged. Items of income in one year and missing in the next may flag your return for further review. And if you’re a business owner, gross profit margin or expenses markedly different from those of similar companies could subject you to an audit.

Certain types of deductions, such as auto and travel expense write-offs, may be questioned by the IRS because there are strict record-keeping requirements involved. In addition, an owner-employee salary that’s inordinately higher or lower than those of similar and similarly located companies can catch the IRS’s eye ― especially if the business is a corporation.

Contact methods

The IRS normally has three years within which to conduct an audit, and often an audit doesn’t begin until a year or more after you file a return. If you’re selected for an audit, you’ll be notified by letter. Generally, the IRS doesn’t make initial contact by phone. If there’s no response to the letter, the agency may follow up with a call. Ignore unsolicited email messages about an audit. The IRS doesn’t contact people in this manner; these are scams.

Many audits simply request you mail in documentation to support certain deductions that you’ve claimed. Others may ask you to provide receipts and other documents to a local IRS office. Only the harshest version, the field audit, requires you to meet personally with one or more IRS auditors.

Keep in mind the tax agency won’t demand an immediate response to a mailed notice. You’ll be informed of the discrepancies in question and given time to prepare. You’ll need to collect and organize all relevant income and expense records. If any records are missing, you’ll have to reconstruct the information as accurately as possible based on other documentation. They may ask to visit your business or home; you will need a representative at the meetings. They have a purpose for every question.

How we can help

If the IRS chooses you for an audit, our firm can help you understand what the IRS is disputing (it’s not always clear) and then gather the documents and information needed. We can also help you respond to the auditor’s inquiries in the most expedient and effective manner.

Above all, don’t panic! Also, do not attempt to save fees by handling it yourself. Many audits are routine but the manner and method of replying may affect the time involved and the outcome. By taking a meticulous, proactive approach to track, document and file your tax-related information, whether for an individual or business return, you’ll make an audit easier and even decrease the chances one will happen in the first place.

The HoganTaylor Tax Practice

If you have any questions about the content of this publication, or if you would like more information about HoganTaylor's Tax practice, please email Tony Otto, Tax Practice Lead, at jotto@hogantaylor.com. You may also contact Denise Felber, Tax Partner, at dfelber@hogantaylor.com

INFORMATIONAL PURPOSE ONLY. This content is for informational purposes only. This content does not constitute professional advice and should not be relied upon by you or any third party, including to operate or promote your business, secure financing or capital in any form, obtain any regulatory or governmental approvals, or otherwise be used in connection with procuring services or other benefits from any entity. Before making any decision or taking any action, you should consult with professional advisors.