Audit Definition: What is an Audit?
An IRS audit is an examination/review of an individual’s or organization’s accounts & financial information to make sure that information’s being correctly reported, in accordance with the tax laws, into verifying the amount of reported tax is accurate. A tax audit’s when the IRS decides to inspect your tax return a little more closely & verify that your deductions and income are accurate. Usually, your tax return’s chosen for audit when something you’ve entered on your return’s unusual.
3 main types of IRS audits:
- the field audit
- the office audit
- the mail audit
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 from 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.
- Keep your perspective clear and constant.
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 a few red flags (6 audit red flags) and the IRS will ask for additional supporting material. For instance, expert real-estate investors could claim losses & write-offs that casual investors may not have the capability to. But you have to meet certain criteria to be a professional rather than a run-of-the-mill investor. So, in case this claim is made by an entrepreneur but the investment activity does not fall into the range that is normal for professionals, the IRS may ask for more substantiation of that status.
16 IRS Tax Audit Red Flags: Tempting Audit Baits For Tax AuditorWhy Are You Being Audited By IRS? – INFOGRAPHIC
2. Get help.
A certified public accountant, Larry Elkin, in Scarsdale, N.Y., mentioned that when he’s audited, he never had to directly deal with the IRS. Hiring a CPA or attorney takes out the emotion from it. Experienced tax accountants and lawyers could identify when an issue is not as black-and-white as an agent may assert. There can be a lot of shades of gray. Your audit could relate to a deduction that is controversial, where the IRS always attempts to take a stance that’s aggressive but where whenever it has gone to court, it is lost. The audit agent’ll write up points that claim a client owes money, he mentions. Often, we argue & win since they do not want a taxpayer to appeal the levy in court & 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 perfect approach to quickly get an IRS audit over with is to have it kept confined to the single issue raised initially. If you talk directly to the audit agents, any tidbit of information that you offer could bring things to the attention of the auditor that he may not have otherwise thought of. That could open a new can of worms.
This is another reason in favor to have someone else representing you in an audit. If I had dealt directly with the agent, I may 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 could overlook important documents or make mathematical errors as simply as a taxpayer can. And when financial values or laws are open to interpretation, the auditor’ll take the stance that’s an advantage to the IRS, the experts mention. That does not mean you cannot argue the opposite point of view successfully. If you donate a piece of art to a non-profit, nobody’s going to dispute that it is deductible, but you could disagree over the deduction size.
In that case, it’s up to you as a business owner to give documents, like appraisals or auction prices for similar items, in order to validate your claimed deduction. If you can do so, the agent might have to accept it or agree to a compromise number.
- Decline requests in order to extend the IRS’s deadline.
Due to a backlog of cases, routinely, the IRS asks company owners that are audit targets to waive the statute of limitations typically restricting probes to the 3 previous years. Taxpayers have a few months to get their taxes done & the government has 3 years to audit them. That’s enough. You don’t have to endlessly accommodate them. The written request for a waiver may not read like a request & it may seem as if you’ve no other choice but to be in agreement. Instead of being intimidated by the legalese, check with a tax adviser prior to responding.
Being stuck to a firm deadline with the IRS maybe will not 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.
Also Read: 3 Tips You Need To Know For Your Upcoming Tax Audit
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