The annual tax filing deadline is quickly approaching. So, if you haven’t already, get in touch to book your tax appointment ASAP!
Of course, tax season can be a very stressful time. To begin with, nobody likes taxes. Gathering the required documentation and worries over how much you might owe can make you more than a little bit anxious.
But those worries are typically assuaged once you’ve met with your CPA, filed your return, and cut checks (however painful it might be) to the government.
That is, unless, the IRS replies with a taxpayer’s most terrifying phrase… “You’re being audited.”
Talk about inducing a full-blown panic attack, yikes! Worst of all…
More Audits May Be on The Way
After paying out hundreds of billions of dollars in pandemic support to keep the economy afloat, the government is eager to refill its coffers with tax revenue.
As such, the IRS is staffing up with thousands of new employees to focus on tax enforcement. All of which means there could be an increase in audits.
Fortunately, if you’re prepared, an audit is likely to be far less traumatic or painful than you might imagine.
What does this preparation look like? Let’s take a closer look…
Red Flags That Can Lead To An Audit
There are some telltale signs the IRS always has their eyes (so many eyes!) peeled for…
One of the biggest is a significant discrepancy between past filings and this year’s return.
Miscalculating deductions or claiming unusually high markdowns can also arouse suspicion.
For business owners, claiming gross profit margins or expenses substantially different from similar companies can prompt audits.
Also, the IRS can question deductions for auto expenses and travel write-offs due to the strict record-keeping requirements.
And owner-employee salaries that are inordinately high (relative to similar businesses in the same general area) will stand out to the IRS as well.
When to Expect An Audit
The IRS typically has three years in which to pursue an audit. And audits usually begin about a year after your last filing.
Taxpayers are usually informed by mail of a pending audit. And the IRS may follow up with a call if there’s no response to their initial letter.
*IMPORTANT NOTE* Ignore any emails referencing an audit. The IRS does not initiate audits through email. These messages are part of a phishing scam.
How Audits Work
The audit begins with a request to mail in documentation supporting your deduction claims in most cases.
On some occasions, you’ll be asked to deliver receipts and other relevant documents to your local IRS office.
In-person field audits are a rarity and tend only to occur when the IRS has reason to suspect grievous misconduct.
Also, the audit process doesn’t begin with a demand for an immediate response. The initial letter will likely note discrepancies and requests, when time permits, supporting documentation.
So, you’ll have ample time to gather the necessary records and prepare your reply. If you don’t have copies of all requested documentation, you must do your best to reconstruct your records based on available information.
How to Prepare in Advance in Case of An Audit
Maintaining meticulous records is key. You may be making perfectly legitimate deductions that just happen to capture the attention of the IRS.
But with the necessary supporting documentation, you have the means to explain any discrepancies. And in turn, you have nothing to worry about.
Also, if you’re working with a qualified CPA like me, I can help guide you through the process.
To begin with, I can help interpret the IRS demand letter, which is often confusing (especially if you don’t speak “tax language”) and ambiguous.
I can also help you assemble the required records. We may even have copies stored with your filing documentation.
And I can help you respond to IRS in a fashion that avoids further complications.
Need Help Preparing for An Audit?
Perhaps you’ve already received a demand letter from the IRS. If that’s the case, I can sort out the details and help you respond. Get in touch for a FREE consultation!