The best time to understand what an IRS audit entails isn’t when you find out you’re being audited. Audits are confusing, so you’ll be doing yourself a big favor by familiarizing yourself with how they work now, when you’re not under pressure from the IRS.
What Does an IRS Audit Mean?
An IRS audit, in terms taken straight from the IRS website, is a review of an organization’s or individual’s accounts and financial information to endure that information is being reported correctly according to tax laws and to verify that the reported amount of tax is correct. A less intimidating definition may be this one: An audit “is simply a ‘second look’ at a business’ tax return for a certain year.”
Many IRS audits are randomly selected from a statistical formula, so if you’re audited, it’s not necessary an indictment of your tax reporting practices. However, the IRS may have spotted some irregularities in your taxes, or they may have found issues with one of your business partners or investors.
Most audits are initiated within two years of the date of your filing; however, some audits go back as far as six years if a significant error has been detected. The length of time required to complete an audit varies, depending upon whether there are irregularities, and if so, their complexity.
What Do I Need to Do for an Audit?
Make Sure It’s Not a Scam
Unfortunately, the IRS and taxpayers alike are frequent targets for con artists. Some scammers will attempt to pose as IRS employees and target victims under the guise of a purported audit. If you receive a phone call informing you that you’ve been audited, please note that the IRS will only inform you of an audit via the mail. Threatening phone calls are scams and should be reported to the IRS via its website.
What Do I Need to Provide?
The IRS may request a variety of documents from you, including receipts, bills, canceled checks and medical records. Electronic records are often accepted. You’ll likely need to provide documentation of any asset depreciations you claimed on your taxes, as well.
How Do They Review My Information?
The IRS will let you know if they are sending an IRS employee to review your records in-person, or if they are relying on you to send them the information to review. Make copies of all documents they examine, as the IRS is not liable for lost documentation.
What Happens if an Audit Reveals an Irregularity?
You’ll likely have to pay additional taxes and fees, but it all depends on the irregularity that they found. As long as you aren’t doing anything illegal, and it’s an honest mistake, it’ll just be a penalty, perhaps interest on unpaid taxes.
How Can I Prepare for an Audit?
You don’t want to be caught flat-footed by the IRS. It’s better to get ahead of the curve. Keep your records for seven years; keep your books organized; triple-check your taxes to prevent irregularities; follow your accountant’s advice. Asset management software can help keep track of your assets so as to streamline an audit in the future.
Do I Have Rights?
Yes. Review your rights as a taxpayer here. Note that you may file an appeal if you disagree with the audit findings.
While your odds of being selected for an audit are low, you can lower those odds that much more by remaining as detailed, as careful and as accurate as possible with your recordkeeping. By all means, find yourself a reliable CPA, which can help ease your mind and ensure that you’re not missing any pertinent information in your reported business income and expenses.
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