While no one enjoys the prospect of being audited, it is important to always be prepared in the event that an audit takes place. There are known “red flags,” but anything can potentially lead to an audit by the IRS. I have had an instance where the IRS didn’t like the ratio of cash vs. credit sales based on the client’s industry, and on the other hand I’ve seen a simple audit requesting support of certain itemized deductions. The reasons for an audit run the gamut, but there are some surefire tips for being prepared.
Here are a few tips for “surviving” an IRS audit:
- Reply promptly to the IRS agent and, if you’re using outside assistance like a CPA or attorney, to them too. If additional time is needed to gather and locate appropriate documentation (i.e. bank statements, receipts, discuss with accountant) and compile a response to the IRS, request it. Generally, this can be a simple phone call or letter to the IRS agent handling the audit, stating that you are working towards gathering the requested information and require some additional time.
- Provide only the information requested; anything more could lead to additional questions and potentially expand the audit.
- Maintain good books and records that clearly document the income, deductions, and credits claimed on your business or individual tax returns. These can usually include items like W-2’s, 1099’s, receipts for expenses, mileage log for business or charitable miles, and letters received from charities documenting date and amount contributed. As a rule of thumb, records for each tax year should be kept for at least 3 years.
- Be respectful and cooperate with the IRS agent. Depending on the extent and type of the audit, the taxpayer could expect to have varying degrees of contact with an agent. If it is just a correspondence audit, the only contact may be the audit letter received and the related letter back to the agent with the information requested. On the other hand, the taxpayer could have a field audit done, where the agent physically comes to the taxpayer’s place of business to perform the audit. In either case, the taxpayer could expect mostly a question and answer type of communication with the agent.
- While many audits are just correspondence audits requesting documentation to support for various amounts claimed on your tax return, it may be beneficial to bring in a licensed professional to assist in determining what is needed, requesting for additional time, and corresponding with the IRS agent.
Being audited might sound like the end of the world at first, but you can handle it! Don’t hesitate to call a Corrigan Krause professional if you have questions about the process.