Procedures, Guidelines, Flags and more when it comes to an IRS Tax Audit
IRS audits are a grueling task. It requires that you provide accurate statements, receipts, books, invoices, and records. It is always advantageous, when presented with an audit, to seek the assistance of a tax professional. This is because the help provided by a professional tax specialist can outweigh any costs that might be incurred during the audit.
IRS Audit Notice, Guidelines, and Procedures
The biggest mistake many individuals make is that they ignore the notice from the IRS about the audit. It is imperative that you respond within thirty days after receiving the IRS audit notice. Responding within the required period of time will prevent the possibility of the IRS accessing your total tax liability and then mailing a bill for all taxes you owe. This can be detrimental because the IRS will not deduct any business related expenses or other expenses that should be deducted from the total tax liability.
It is vital to read the IRS audit notice thoroughly and utilize it to assist you in determining what items you will need to provide during the audit.
Organizing your Records
It is vital to ensure the auditor is able to do their job properly and effectively. This includes gathering and organization all necessary records for them to go through.
1) Do not be scared to highlight certain items or include receipts, adding machine tape, or other necessary documents that are necessary for you.
2) It is your job to replace any records that are missing; it is not the job of the IRS.
3) Allow the auditor to go through original documents, but only give them duplicates to take back to the office. The IRS cannot be held accountable if they lose any of your original documentation.
Yes, this may seem a bit odd, but many individuals are inclined to get frustrated when in a meeting with an auditor, because they feel as though it is an invasion of their privacy. Even if you are unfortunately saddled with an auditor who is less than reasonable, you must be cooperative. They are not in the hot seat, you are, and the more frustrated you get with them and show it, the less likely they are going to be helpful in this situation.
High Audit Risk
The following fields are at high risk for an audit to occur.
1) Cash intensive business. Jobs where individuals earn tips, such as waiters, mechanics, and hairstylists are in the category of high audit risk.
2) Heath care professionals. Medical professionals that run their own businesses, such as doctors and dentists, are often at high risk for audits. This is because they are responsible to guarantee all income, deductions, and expenditures are reported accurately to the IRS.
3) Individuals in the legal field. Accountants and lawyers are at high risk for audits because they may try to be too creative or bold in filing their taxes.
Tax Audit Flags
Before sending an audit notice, the IRS searches for possible red flags, which include:
Unusual deductions – individuals who make large, unusual deductions that can be spotted easily
Income – when it comes to income, there are some red flag indicators that the IRS looks for:
• Round numbers throughout a tax report, such as $10,000 or $5,000, as in real life, these numbers are extremely rare
• Income does not match the cost of living associated with the neighborhood you currently reside in
• Radical changes in come between fiscal years
• Returns that are not complete
Medical deductions – need to exceed a certain portion of your total income or else you are not able to claim them
Charity deductions – charity deductions cannot be proved with only receipts. If a large amount was donated, the individual needs to receive a letter sent by the charity that provides the details of the donation for your personal records
Office/business deductions – numerous taxpayers find themselves in trouble with the IRS because they claim business deductions for items that are not acceptable, qualified deductions. Items such as computers, programs, trade tools, and other office supplies count toward business deductions; cars and luxury cruises do not count as a qualified deduction. An IRS agent is easily able to spot the difference during an audit.