An audit from the IRS can strike fear in your heart and raise a lot of questions. Did I do something wrong? Will I get in trouble with the government? These questions can create a lot of anxiety about you or/and your business. By understanding what an audit is and why you are receiving one, you can start to understand your options and how you can survive an IRS tax audit.
What is an audit?
An audit is when the IRS reviews all your financial accounts. They will do their due diligence to make sure that your financial statements match up to the numbers depicted in your bookkeeping. It’s their way of ensuring that all income is being reported and that you aren’t trying to pay less in taxes. However, if you receive an audit, it doesn’t necessarily mean you did anything wrong. There are several reasons you could receive an audit:
- RANDOM – You were selected at random by the IRS system.
- FLAGGED – A computer screening that flagged your return as being abnormal.
- ASSOCIATION – If your tax return is associated with another taxpayer who is being audited, you could then be evaluated as well.
Regardless of why you received a tax audit, you are now having your finances looked at by the IRS. So, what do you do next?
Types of Audits
The first thing you’ll want to do is establish which kind of audit you are receiving to have a better understanding of how the process will work. Oftentimes, an audit from the IRS doesn’t play out how it seems like it does in movies or television, with brooding figures arriving at your doorstep. It is usually much simpler than that, by people just trying to do their job and make sure all taxes are paid correctly. There are a few different types of audits. An audit will fall into one of the following categories:
- Correspondence audit- As defined by the IRS, “a correspondence audit is relatively limited in scope. An agent typically conducts the audit using letters and phone calls to work with the officers or a representative of the organization. A correspondence audit can expand and become an in-person (field) audit, particularly if the issues grow more complex or the organization does not respond.”
- Office audit. An office audit will be held at an IRS office. You may be asked to go into the IRS offices to have your records reviewed. It’s important to make sure you are prepared to pay any necessary fines or dispute any charges legally with a CPA or lawyer.
- Line-by-line audit. The IRS goes through each line of your tax return. If something doesn’t make sense based on the information provided, the examiner will point out the mistake and ask for an explanation or figure out the mistake.
Regardless of the type of audit, you’ll want to be sure that you are prepared to pay a fine or seek legal guidance to dispute any charges. This is the first step in surviving a tax audit.
An audit does not mean a death sentence for you or your business — there can be multiple outcomes. Sometimes, there is nothing wrong at all with your taxes, and your financial statements are all in order. Other times they will tell you that you owe them money. You can even fight the charges and dispute them legally with a tax lawyer or CPA. Some people believe an audit will ruin them or their business, but the most common penalty is a fine unless the IRS suspects criminal intent or activity.
The best offense is a good defense, and in this case, it’s taking preventive measures so that you never receive an audit in the first place. This is where it’s important to be consistent with your bookkeeping to help prevent mistakes. Let’s take a closer look at the steps you can take to be more consistent and how you can try to avoid ever receiving an audit in the first place.
How to Prevent an Audit
Regardless of your preparation, you may still receive an audit. However, you can take steps to make it easier on yourself should you receive an audit or provide the proper information to where you do not receive an audit at all.
First, you’ll want to make sure all your income is accounted for. The IRS will use the information provided on your tax forms, such as a W2, 1098, and 1099 to compare the income and deductions you report on your return— with the information reported by employers, banks, businesses, and whatever other parties report information based on your income.
You’ll want to make sure this information is accurate and there are no discrepancies—otherwise, you could be inviting the IRS to take a closer look at your tax return.
Next, you’ll want to make sure to double-check your return. Seriously. I know we just covered being accurate in the information you provide on your return, but double-checking your information is correct, is part of the process. One careless mistake or error can have the IRS taking a closer look at your tax return.
Lastly, you’ll want to be consistent in your accounting. Whether you use a program to keep track of your income or business financials, or if you choose to hire a bookkeeper—you’ll want to be consistent in your method. Not sure about what bookkeeper to hire? We can help with that!
Trust Your Taxes with Eco-Tax
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