Reduce Your Odds of Getting Audited & The Steps To Take If You Do
An IRS audit of your taxes can be a nerve-racking experience. Fortunately, the odds of getting audited are low. According to the 2017 IRS data book, of the 150 million returns the IRS processed, it only launched 1,188 investigations into legal source tax crimes.
Sure, honest mistakes or even negligence aren’t likely to trigger a criminal investigation. However, some businesses and individuals receive an audit if some part of your tax return was called into question and the IRS wants to see your records to verify that your return is accurate. Audits of simple discrepancies are often conducted by mail. If the IRS has more serious questions, an agent may want to conduct an in-person interview.
There’s no sure way to avoid an IRS audit of your tax return, but these red flags could increase your chances of drawing unwanted attention from the IRS.
- Income other than basic wages, such as contract payments.
- Making a mistake when calculating and reporting dollars on a return.
- Unreported income, such as investments.
- Owning a small business where it’s easier to hide income.
- Reporting losses from businesses that the IRS classifies as hobbies
- Deductions and credits for unusual amounts.
- Claiming significant charitable contributions.
- Rounding dollar amounts that consistently end in zero and five
If you do receive an IRS audit letter in the mail one day, these are the specific steps you need to take:
Step 1: Read the notice carefully
Take a good look at the audit notice you received. Many audits are desk audits or computer document-matching audits rather than the complete tax return audits done in-person. You may simply be asked to verify certain lines on the return. No need to panic. Be sure to understand exactly what is being asked.
Step 2: Collect and prepare copies of the required documents
Keeping thorough, organized financial records year-round is the smartest way to avoid an audit nightmare. Provide organized documents such as 1099s, K-1s, W-2s, and canceled checks, and reconcile them to the amounts claimed on the return. If you do not have adequate documentation, it’s more likely that you won’t get the deduction. Always make copies.
3. Submit your documents on time
Don’t make matters worse by missing deadlines. An audit is a serious matter that can result in heavy fines, and you don’t want to put more stress on the process by being uncooperative. Follow the guidelines and get your documents submitted on time.
4. Have a professional by your side
An experienced certified public accountant and a tax professional that has experience with tax audits can help communicate with the IRS on your behalf. They can help prepare files or submit documents as well as provide advice going into an audit. Very often, giving a tax professional a power of attorney authority may avoid the taxpayer from having to sit down with the IRS agent, which many taxpayers would like to avoid.
Jeanine Hemingway, CPA is a tax planning, tax preparation, bookkeeping, accounting and advisory firm located in Austin, Texas. Our goal is to provide each client with professional and personalized service. If you have received an audit letter from the IRS, or want to ensure you’re doing your best to avoid unwanted attention from the IRS, contact our office today.