If you have been through an audit or know someone who has, you know it’s an experience you’d rather not go through. Out of the 160 million individual returns the IRS receives every year, 1.11% or 1.8 million of those returns get audited.
However, not all taxpayers get the same level of attention. Learn about the different types of tax audits, how to prevent and cure, and how our team of advisers can help you in case you do get audited.
Types of Audits.
The IRS conducts audits via correspondence and field audits.
“Correspondence Audits” are computerized and compare what was reported on a tax return versus what was reported to the IRS. As a result, the goal of these audits is to address discrepancies by focusing on unreported items. “Field Audits” involve an auditor who contacts the taxpayer to set up a face-to-face interview and starts the process. Field audits focus on finding unreported income and overstated expenses.
How to Prevent an Audit.
It all starts with how your return is prepared, as well as who is preparing it.
The key of correspondence audits is that the return includes all tax forms received for a given year. We refer to this as “completeness,” and advise you inventory all your tax forms and separate them by Income Category and Schedule. Another technique involves checking your current year return against the prior year to make sure there is consistency.
The goal for a field audit is to minimize red flags on the areas with high inherent audit risk, such as schedules that report income and expenses for self-employed, or forms that show activity for rental units and more. More advanced techniques include allocating expenses and deductions into smaller fractions and applying industry standards that measure audit risk. These methods require the intervention and expertise of a qualified, licensed tax preparer with background in tax litigation.
How to Cure an Audit
You checked the mail and got a love letter from the IRS: “We selected your return for examination.” What do you do? The very first thing is to review the items the IRS is challenging, and then determine the potential exposure in terms of how much additional tax the agency is trying to assess.
Since Correspondence Audits are automated, you need to know that a flawed entry on the IRS database will lead their computer to believe you may be under reporting income.
However, should the unreported item(s) be legitimate, you will then be left with three choices:
1) Agree to the assessment
2) Partially agree
3) Completely disagree
We advise not to panic and carefully evaluate the nature of the under reported item before agreeing to the assessment. Further, we always advise amending the tax return in question to account for the missed item, rather than submitting documentation to the unit handling the correspondence audit.
For a field case, the procedures to “cure” an audit are more complex. The ultimate goal of a field audit are to produce additional tax liabilities, assess severe penalties and interest, and expand the scope to additional years. Therefore, proper handling of the first year under audit is crucial to determine how much damage the IRS can make. You will have to gather records that serve as sufficient evidence for the income and deductions reported. You also have to prove that the expenses incurred were necessary and ordinary, and that you were in business for a profit. The key is to provide a very well organized package in which all the income and expenses are properly and neatly categorized with the supporting documentation being summarized in a way the auditor does not have to perform an in-depth inspection.
How We Can Help
Our team of tax advisors includes experienced Tax Attorneys, CPAs, and IRS licensed Enrolled Agents; and has successfully handled hundreds of audits for taxpayers in all 50 States and countries worldwide. We are strong advocates for our clients, who have been able to save them millions of dollars aside from preventing the scope of their audits from expanding further. We love to fight on behalf of taxpayers and take each case through the appropriate chain of command to ensure the best possible outcome is attained. As we take pride in the quality and timeliness of the professional services we provide, we are also extremely mindful of the psychological aspects that an audit brings to the table. We are passionate about providing superior client service, peace of mind, and relief to many individuals. If you have been audited, know someone who is going through the process, or would simply like to obtain more information about services, please contact us to schedule a free consultation. We are here to help.
