From The Experts: Proven Checklist To Pass Your Tax Audit
If you are chosen for an audit, you might spend countless hours compiling documentation to accommodate the auditor's requests, depending on the scope of the investigation and how well prepared you are.
The Internal Revenue Service (IRS) audited 0.7 percent of all individual tax returns and 1.1 percent of corporate income tax returns in 2015. However, if your company is one of the select few, taking the necessary precautions can help ensure that this stressful event ends on a positive note.
1. Don’t Panic!
You might assume the IRS is out to get you when you receive an audit notice. However, keep in mind that in-depth field audits are unlikely.
Correspondence audits are the most common type of audit these days which are more similar to error corrections. The IRS may request that you send in supporting documents for those reports submitted on your return, or they may simply send you an invoice for the excess tax payable as a result of a missing 1099 or a math error. If you have the documentation, mailing it in and closing your file should not be a problem.
Field audits are more in-depth and are the ones that taxpayers are most concerned about, and are normally issued in your workplace.
2. Gather all possible documents or reports as backup.
If you're chosen for a field audit, the IRS will send you a formal request for the paperwork they're looking for. Receipts, bills, canceled checks, copies of contracts or other legal documents, loan agreements, travel logs, and job records are examples of what you might need to retrieve.
Take some time to gather the documents, reports, and backups you'll need. If you are alreadu using a cloud accounting solution, generating your profit and loss statement and any other reports you require for the year(s) in question should be simple. Make copies of any bank statements, receipts, or other documents to submit to the auditor so you can keep the originals for your records.
Be mindful and track unusual deductions, such as excessive meals, entertainment, and travel expenses. IRS auditors examine a large number of returns to get a sense of what income and spending are typical for various sorts of businesses, since these areas are prone to abuse.
Of course, odd spending like excessive entertainment and travel expenses can have completely legitimate reasons, so keep track of them to substantiate the amounts upon audit.
The best defense is a solid offense; therefore, business owners who keep thorough, organized records will be in a far better position than those who have to sift through mountains of paperwork to get what the auditor is requiring.
3. Look for Additional Deductions
The IRS will impose the additional tax owed, plus interest, from the date the tax should have been paid if you omitted to include certain revenue on your return or claimed deductions for which you were not qualified. They may also impose sanctions.
However, before the auditor seals the file, double-check that you haven't overlooked any deductions that could offset the rise in taxable income.
Business mileage, home office expenditures, charitable contributions, and charges made with a personal PayPal account or credit card are all frequent deductions that many taxpayers overlook.
Take a look at your Expense Report and compare it to your bank and credit card bills. Submit documentation for ignored deductions along with the paperwork sought by the auditor. If you can prove enough reasonable expenses, the auditor may decide that you are entitled to a reimbursement!
4. Substantiate Your Deductions with Creativity
Perhaps you weren't particularly attentive in keeping records throughout the audited year. Even if you don't have all of your receipts and records, you don't have to forfeit your deductions.
Third-party documents, oral testimony, and other types of verification are often allowed by the IRS to verify claims. If you used your personal vehicle for business but neglected to keep a mileage log, you might be able to recreate it using your calendar, Google maps, and client data. If you're missing receipts for previous purchases, you might be able to get a replacement from the vendor.
5. Next Steps: TAKE IT TO THE PROS
If the thought of speaking with an IRS auditor makes you feel uneasy, seek the advice of a CPA.
While hiring an accountant will cost money, it will free you of the burden of dealing with all of the paperwork requests. Furthermore, specialists are familiar with tax legislation and auditors.
In the case of a field audit, the auditor will schedule an initial appointment with you (or your representative) to interview you and ask questions concerning your returns. Be truthful and as detailed as possible in your response, but don't include any extraneous information. If the auditor uncovers something that doesn’t seem right, an audit that starts with one issue might grow to other issues, other tax years, and even the tax returns of other people and businesses. Allowing a professional to speak for you can help you avoid making mistakes that cause audits to drag on indefinitely.
Following the audit, the auditor compiles an examination report that details the findings.
Make an effort to strengthen ties with the auditor, whether you employ a professional or go it alone. While you should ask questions and defend lawful deductions and tax return positions, keep in mind that auditors have the discretion to dismiss or reduce penalties. If you are honest, reasonable, and professional with your auditor, you should receive the same treatment.
We are here to help at SRG Advisors. CPAs Jay Guttmann, Leon Schenker, and Milton Rosenblatt are experienced professionals who strive to help businesses operate more efficiently and confidently. Our firm, SRG Advisors, LLC, provides accounting and tax services to many businesses in Hackensack, Teaneck, Fort Lee, Paramus, and the surrounding communities.
Schedule a call with us at 201-525-1222 or email us at email@example.com