An IRS audit is a review/examination of an organization’s or individual’s accounts and financial information to ensure information is being reported correctly, according to the tax laws, to verify the amount of tax reported is accurate. A tax audit is when the IRS decides to examine your tax return a little more closely and verify that your income and deductions are accurate. Typically, your tax return is chosen for audit when something you have entered on your return is out of the ordinary.
We all dread having the IRS tell us it wants to reassess our previous year’s tax return. Let me start off by saying that if you’re being audited, you should probably look for help in a Tax professional. But if you’re the do-it-yourself kind, then there are certain things you can do to deal with the audit. I hope you find the tips helpful.
Almost no audits are the line-by-line examination of the return, which is what most people imagine when they think of an IRS probe. Often it is just a math error, or a mistake in the supporting documents.
Beyond that, sometimes a single aspect of a return will raise few red flags (6 audit red flags) and the IRS will ask for additional supporting material. For example, professional real-estate investors can claim losses and write-offs that casual investors might not be able to. But you have to meet certain criteria to be a professional rather than run-of-the-mill investor. So if an entrepreneur makes this claim but the investment activity doesn’t fall into the range that’s typical for professionals, the IRS might ask for further substantiation of that status.
2. Get help.
Larry Elkin, a certified public accountant in Scarsdale, N.Y., says that when he was audited, he never dealt with the IRS directly. Hiring an attorney or CPA takes the emotion out of it. And experienced tax lawyers and accountants can recognize when an issue isn’t as black-and-white as an agent might assert. There can be a lot of shades of gray. Your audit could relate to a deduction that’s controversial, where the IRS always tries to take an aggressive stance but where every time it’s gone to court, it’s lost. The audit agent will write up points that allege a client owes money, he says. We often argue and win because they don’t want taxpayers to appeal the levy in court and win.
3. Provide exactly what the agent asks for.
Resist the urge to volunteer information. It’s ideal to provide no less, but no more than the IRS requests. The best way to get an IRS audit over with quickly is to keep it confined to the single issue initially raised. If you talk directly to the audit agents, any tidbit of information that you offer could bring things to the auditor’s attention that he might not have thought of otherwise. That could open a new can of worms.
This is another reason in favor of having someone else represent you in an audit. If I had dealt directly with the agent, I might have invited an open-ended fishing expedition. The other way the agent had to decide what he wanted to know. He asked and we answered.
4. Don’t assume the IRS is right.
Agents can make mathematical errors or overlook important documents as easily as a taxpayer can. And when laws or financial values are open to interpretation, the auditor will take the stance that benefits the IRS, the experts say. That doesn’t mean you can’t successfully argue the opposite point of view. If you donate a piece of art to a nonprofit, no one is going to dispute that it’s deductible, but you can disagree over the size of the deduction.
In that case, it’s up to you as a business owner to provide documents, such as appraisals or auction prices for similar items, to substantiate your claimed deduction. If you can do so, the agent might have to accept it or agree to a compromise number.
5. Decline requests to extend the IRS’s deadline.
Because of a backlog of cases, the IRS routinely asks owners of companies that are audit targets to waive the statute of limitations usually restricting probes to the three years previous. Taxpayers have a few months to get their taxes together and the government has three years to audit them. That’s enough. You don’t have to endlessly accommodate them. The written request for a waiver might not read like a request and it might seem as if you have no choice but to agree. Rather than be intimidated by the legalese, check with a tax adviser before responding.
Sticking to a firm deadline with the IRS probably won’t release you from an audit. The agent will finish as much as possible in the time allowed. If he’s right, you should pay the claim; if he’s not, you should dispute it. Either way, a proper response should bring the audit to a prompt close so that you can move on–and start getting ready for the next tax season.
When you prepare your taxes with DefenseTax, you automatically receive our Audit Support , which will help you understand why IRS contacted you and how you should respond. we also offer the added protection of Audit Defense, which provides you with professional representation of irs tax attorney in the case of an audit – you’ll never have to speak to the IRS if you don’t want to.