You can never predict a tax audit. They sometimes occur randomly or when errors are uncovered after submitting taxes. This applies to both personal taxes and business taxes. Though, a tax audit can be more of a hassle for a business.
If you’re worried about a tax audit or have received an audit notice, then take a moment to learn more about the process and find out how to handle a tax audit.
Understand the Reason for the Tax Audit
First, you should consider the reason for the tax audit. As mentioned, audits can occur randomly. Though, there are other potential reasons. In addition to random audits, tax returns can get flagged for containing errors or discrepancies.
There are also conditions that could increase your chances of getting audited. For example, self-employed individuals and those with a higher income are more likely to get audited.
Understanding the potential red flags for a business audit can also help lower your chances of getting audited. Red flags include consistently filing your taxes late and reporting a net loss for consecutive years.
You may want to consult with a tax expert, such as a certified public accountant. In fact, if you worked with a tax professional to complete your tax return, then they should be willing to assist in the event of an audit.
They may even offer this assistance for free – especially if the audit is due to an error that the tax professional didn’t catch.
You can learn more about the reasons for the audit by reading the audit notice. The letter should contain a list of information that the IRS will need to complete the audit.
It should be mentioned that these audit notices are always sent via mail. You won’t get an email or phone call from the IRS. Scammers often use email or phone messages to try and get your personal details. But, the IRS will always send a letter.
Never Ignore Your Tax Audit Notice
Once you receive a tax audit notice, you’ll generally have several weeks to gather the information that you need for the audit. But, don’t ignore the notice.
Even though you have several weeks to get everything in order, you should still make this a top priority.
Before responding to the audit notice, begin preparing your records. As mentioned, the audit notice should contain a list of the required information. Don’t forget about receipts, invoices, bank statements, and other records.
You should also get in the habit of keeping good records. Waiting until April each year to compile your records increases your chances of making a mistake on your tax return. It also increases the stress of the situation. Keep all records for up to three years.
The main point is that you want to gather any documents that the IRS has specifically requested, along with any other relevant records.
Schedule a Meeting with an Auditor
The audit will often need to be conducted in person. Some auditors may try to arrange a meeting at your place of business or home. Instead, you should arrange to meet at the nearest IRS offices.
Though, some audits can be conducted by mail. When submitting your response by mail, you can receive a one-time automatic 30-day extension. But, if you need to petition the audit results, you will have just 90-days to petition the tax court.
Again, it’s advised that you work with a tax professional, such as a CPA. They should attend the audit meeting with you. They’ll be prepared to answer any questions that the auditor has.
When responding to the auditor’s questions, make sure that you’re truthful with all statements. Don’t use excuses for inaccurate information. Your responses should be straightforward and direct.
Also, don’t bring previous tax returns unless the auditor specifically requests them. Stick with the documents that were listed in the audit notice.
The length of the audit process can vary. This depends on the information requested and the complexity of the issues flagged by the auditor.
Know Your Tax Rights
It’s also important to know your tax rights as a taxpayer. You have rights related to the examination, appeal, and refund processes. Your rights also include:
- The right to professional treatment by the auditor
- The right to privacy and confidentiality
- The right to know why the IRS is requesting an audit
- The right to representation – such as an enrolled agent or CPA
- The right to appeal any disagreements
Again, working with a professional will help ensure that your rights aren’t violated. And, they can be helpful if you need to appeal the audit decision.
There are three potential outcomes of the audit. First, the auditor may find that no changes to your return are needed. This occurs when you and the auditor agree that your return was filed properly. This is more likely to occur when your return is randomly selected for an audit.
The second possible outcome is that the IRS will propose changes to your return and you agree with the changes.
If you agree with and understand the changes, then you’ll arrange any necessary payments and the audit process will be concluded. You will also sign a report indicating that you agree with the changes.
When you owe money, you have several payment options. The IRS collection process provides the option to pay via electronic transfer, IRS direct pay, or debit or credit card. Cash payments can also be accepted, but there are additional steps.
When paying your taxes with cash, you need to give yourself extra time. It can take 5 to 7 days to process the payment. You also need to visit the Official Payments Site and follow the necessary instructions.
You will then receive an email confirming your information. This could take several days. After your information is verified, you will get an email with a link containing your payment code. Then, you’ll visit a participating retail store to submit your payment. If you choose this option, make sure that you get a receipt after paying with cash.
The third possible outcome is that the IRS proposes changes to your return and you disagree with the changes.
If you disagree with the results of the audit, then you can request to speak with an IRS manager. After meeting with the manager, if you still can’t settle the matter, then you have the option to file an appeal.
Learn More About the Audit Process
You can find additional information about the audit process from the IRS website. The IRS has a series of standard guides for auditors to use. By reviewing these guidelines, you’ll be better equipped for the actual audit.
You can also learn more about the records that they might request. This includes:
- Canceled checks
- Legal papers
- Loan agreements
- Medical or dental records
- Theft or loss documents
- Employment documents
When the audit process is conducted by mail, you might also need to fill out a tax audit questionnaire.
If you’re submitting this questionnaire and your documents by mail, you should ensure that the IRS receives your response. Depending on the delivery service that you use, you can request confirmation that the package was delivered.
Additional Tips for Dealing with a Tax Audit
In addition to the tips already discussed, there are a few more suggestions that can help make the audit go smoothly.
The results of the audit should be made clear immediately. The auditor will either agree with your reporting or they will determine that you still owe more money. If you’re not happy with the results, you can appeal the audit.
If you plan to appeal the results, you want to work with a tax professional. They will understand the appeal process and can ensure that your rights aren’t being violated.
You should also know that the IRS has a timeframe for requesting these audits. They have 3 years from the time that the tax return is filed. If you’re being audited for an older tax return, the reason is likely due to perceived tax fraud.
You also have the option of delaying the audit. While you have several weeks to schedule the meeting and should complete the audit as soon as possible, you can postpone the meeting to ensure you get your records in order.
Avoid Future Tax Audits
Most tax audits are randomly chosen. This means that you can’t entirely prevent tax audits. But, you can take steps to reduce the chances of getting a future tax audit.
One of the best solutions for limiting your chances of getting audited is to double-check all math and entries on your tax return before submitting the return. Go over every line and use a calculator to recheck all figures.
This applies to both personal and business tax returns, whether you’re working with a tax professional or filing your own taxes. Even tax professionals can make mistakes, so don’t hesitate to double-check their work.
Another area of your tax return that could lead to an audit is the reporting of business expenses. Unordinary expenses are red flags. Only deduct necessary expenses and keep all documents related to these expenses.
In the end, a tax audit doesn’t have to be a scary experience. Be honest with all statements and bring any requested documents to your meeting with the IRS. And, consider working with a CPA to complete the tax audit process, whether your audit is for your personal or business taxes.
Remember, audits usually occur randomly, though some happen because of a red flag on your tax returns. But armed with the right information and the support of a tax professional, an audit can be a much less stressful process for you.
If you have any other suggestions for dealing with a tax audit, please leave a comment below.