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The Business Guide to Surviving an IRS Tax Audit


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There’s no need to break into a sweat if you’re selected for an IRS tax audit. An understanding of what the Internal Revenue Service (IRS) looks for in a tax audit can make businesses more prepared and comfortable. So mop your brow – we’re getting started.


Table of Contents

What Does the IRS Look for in a Tax Audit?

What Documents are Required for an IRS Tax Audit?

How to Prepare for an IRS Audit

After the Tax Audit

Conclusion


What Does the IRS Look for in a Tax Audit?


First things first: If you are selected for a tax audit, the IRS will notify you by mail. Audits are not initiated by telephone. Within the letter, you will be given all relevant contact information and instructions.


Furthermore, audits will be managed either via an in-person interview or by mail. The interview can take place at an IRS office (which is called an “office audit”) or at the taxpayer’s residence, place of business, or accountant’s office (which is called a “field audit”).


An auditor will review the returns. She may or may not accept it. In case the auditor determines that something is questionable, she will forward the return to an examination group.


Note that the selection for an IRS tax audit does not necessarily indicate that there is a problem. There are a few of different methods for selection. Here are two of them:


  • Related exams: Your business may be selected when your returns involve transactions or issues with other taxpayers, like investors or business partners, whose returns had been chosen for audit.

  • Computer screening & random selection: At times, a statistical formula determines whether or not a return is selected. The IRS compares your tax returns to the “norms” for similar returns. These norms are developed from audits of random return samples.


What Documents are Required for an IRS Tax Audit?


The IRS will require you to present documents that support the credits, deductions or income you claimed on your return. Generally, you will not have to create anything new for this.


Some electronic documents produced by tax software are accepted. These may be requested in place of or in addition to other records.


Note that you are required by law to keep all records used to prepare the tax return for at least three years from the date the return was filed.


While each audit focuses on certain aspects of a return, the types of records requested will likely include the following. Remember to only send copies and not originals, and to include the circumstances surrounding any document you send.

  • Bills

  • Receipts

  • Loan agreements

  • Legal papers such as criminal or defence papers, property acquisition, tax advice or preparation, and divorce settlements

  • Cancelled checks

  • Diaries or logs, which may display locations, dates and purpose of travel, gambling losses and winnings, expenses, and job-hunting activity

  • Dental and medical records

  • Loss or theft documents (learn how to avoid financial crime), including insurance reports, and videos or photos of damage

  • Travel and lottery tickets

  • Employment documents, including educational requirements, dress codes, and W-2 reimbursement statements or policies


Remember, to help maintain organized records, it is advisable to conduct daily reconciliation. It is also highly recommended to use reconciliation automation software such as Crush Errors, which works far better than any Excel sheet.


How to Prepare for an IRS Audit


Aside from the obvious point of having your documents ready, here are the best tax audit tips for smooth sailing.


1. Know the Type of Audit


Types of audits include field audits, office audits, and correspondence audits. Note that the majority of IRS audits are inquiries by mail.

  • Field audits: These are usually conducted at the taxpayer’s home or place of business, and are often considered more strenuous than other types of audits. The IRS will want to put your tax situations in context. Note that if the audit takes place at your office, you will need to provide space for the agent and may have to deal with questions from employees regarding the state of the company.

  • Office audits: These are conducted at an IRS office. They are more rigorous than correspondence audits, but typically focus on specific matters laid out in a letter. For instance, if a director has substantially deducted travel costs, the IRS agent may want to see receipts and documents of travel expenses.

  • Correspondence audits: These involve letters that often request proof of positions, such as proof that office furniture was bought. This can easily be handled by sending photocopies of the credit card statements or receipts, showing the amount and date.


2. Representation Matters


Dealing with the IRS directly can be arduous. You may want to hire a CPA or attorney to do it for you. Furthermore, experienced accountants and tax lawyers will be able to recognize issues that are in shades of gray.


If you only have to deal with a correspondence audit, you can avoid professional help. However, in the case of a field or office audit, DIY is not recommended. There is a chance you might do or say something that could lead to further inquiries from the IRS.


Work with your attorney or CPA during the audit so that you can concisely answer questions. Ideally, don’t volunteer information, and only answer questions posed to you.


3. Know Your Rights


In 2014, the IRS spelled out 10 taxpayer rights, which Congress codified as part of the extender legislation. These include the rights to:

  1. Be informed

  2. Privacy

  3. Challenge the IRS’s position and be heard

  4. Pay no more than the correct amount of tax

  5. Retain representation

  6. Appeal an IRS decision in an independent forum

  7. Confidentiality

  8. Finality

  9. Quality service

  10. A fair and just tax system

If the agent asks you a lot of questions, this is not necessarily a bad thing; you are being given an opportunity to prove them wrong.


After the Tax Audit


In the issued examination report given by the auditor, any penalties you owe will be listed, with the interest rate included in the cost. If you agree with the report, you can end the audit process by signing and paying what you owe.


However, if you disagree with the report, you are entitled to an appeal. You will be sent a letter by the agent explaining your right to appeal. You must respond to this letter within 30 days of receiving it. (It is important to consider that the cost of appeal may be close to the penalties you owe.)


Conclusion


An organized, prompt response, as well as professional tax audit help, should bring the audit to close without any major headaches. An IRS audit should not necessarily be cause for significant concern.


One of the keys to maintaining proper records for audits is daily reconciliation. Accountants everywhere groan at the idea of it, but you can spare your accounting department with NextGen Accounting’s reconciliation services.


We offer credit card reconciliation services, and bank reconciliation services, conducted with our patented reconciliation automation software. Our management team has decades of experience and includes former executives of Barclays Bank, Bank of America, and ICBC.


To make your accounting processes smoother, contact us today for reconciliation services!

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