No doubt about it, tax audits can be stressful!
Who wants to go through an IRS or state tax No one wants to have the experience of going through an IRS examination. But if you do receive a tax exam notice, what should you do? That is the subject of this week’s Tax Update.
The purpose of an audit is to verify that the submitted tax return is accurate, as well as to promote compliance with the tax laws. The selection process is based on numerous variables. Some are selected on a computerized scoring basis. Receiving a notice does not indicate that the government thinks you are dishonest or error-prone. In fact, in some cases, the examination will end up as a refund to the taxpayer, or no changes at all.
First, the IRS does not, and will never, call the taxpayer over the phone to inform you about an upcoming audit or demand instant payment. As we have noted time and again, scams, identity theft, etc. have been on the increase. The IRS still uses conventional mail to contact taxpayers.
There are a few important steps that you can take to prepare for an audit.
When receiving a notice of an audit/examination, read the notice in its entirety. There are three ways the IRS conducts an audit. By mail, in person at your home or at the IRS office.
The notice also contains a list of requested information, i.e. form 4564 Information Document Request. Depending on the nature of the audit, the requested material could be: Receipts, bills, canceled checks, legal papers, loan agreements, logs or diaries, tickets, medical records, theft or loss documents or employment documents. The IRS accepts some forms electronically, but be sure to check with the auditor first.
Note that if receipts are requested, then you should also include the surrounding circumstances that support the requested item. For example, when deducting meals as a business expense, it is required to provide the name of the person/client you had lunch with, and include major discussions points held during that time. The more detailed the information you can provide to the IRS auditor, the lesser the risk for an unfavorable outcome. If you encounter any gaps from the receipts and the number you reported on your return, try to do your best to reconstruct the missing pieces.
Organize all documentation as neatly as possible. If the notice asks to submit the requested documents by regular mail, be sure to send it certified and keep the mailing label as proof of delivery. Always keep the originals of all your receipts/bills and only provide copies. If the audit is conducted in-person, have all documents gathered and sorted.
In terms of the length of the audit, there is no set limit. It depends on the complexity, the availability of the information presented and the schedules of both parties.
The audit usually concludes with the examination findings. No change, agreed on changes from both sides or disagreements with the proposed changes by the IRS auditor.
Being selected for an IRS audit can cause frustration and will cost you extra time to prepare. When a notice does come, be sure to contact your tax consultant to receive proper guidance and assistance throughout the process. In addition, another person can provide objective strategies since he or she is not personally involved. In general, auditors are just trying to do their job, and a qualified representative can help you get back to doing your job!
BGBC Partners, LLP is a full service certified public accounting and business consulting practice.