Across the table your adversary is quietly asking you questions, but it's hard to concentrate. Your heart races, palms sweat, and you want to hit the door at full speed to escape, hoping against hope never again to find yourself in such a place.
But really, IRS audits shouldn't be that stressful.
If a taxpayer knows he or she has been loose with their financial honesty, concern is warranted. However, quite often calm can prevail because you've prepared correctly for an audit.
There are many audit triggers, but some of the common ones are:
- Noticeably high business entertainment deductions.
- Consistently filing losses under Schedule C.
- Home office deductions (rules for this deduction are quite strict).
- Tax return errors.
- Failing to report income.
- Claiming 100 percent use of your vehicle for business purposes.
- Deductions that exceed regional averages for your income level.
The IRS for audit purposes generally doesn't go back beyond three years of tax returns, but will go back farther if a significant issue is uncovered. Even then it's unlikely returns more than six years old will be scrutinized.
The IRS will never contact you by phone or through email. The IRS will send you a notice of audit through the U.S. Mail.
If you're being audited, it's because the IRS found something that in its world is saying, "Look at me." Your task is to answer the questions and provide information that conforms to IRS rules, not yours.
Whenever an audit occurs — and you're confident it'll show you've been following the rules -- the best demonstration is to have kept excellent records. This means, however, not keeping records you think are complete, but doing it according to the IRS requirements.
For example, under what the IRS calls the "burden of proof," if a taxpayer comes to an audit with detailed records for deductions — up to and including at-the-time handwritten explanations of the event and reason for the deduction — but doesn't keep the receipts, the deduction probably won't be allowed because the IRS needs the receipts.
The responsibility falls on you to prove the validity of claimed deductions. You need to show not only proof of payment, but also a line-item detail of the items purchased. For restaurants, the receipt that lists the items ordered must be submitted, not just the signed credit card receipt.
Before the audit you should try to compile information for the request from the originating source, or whatever is necessary to create as complete a history as possible. Other audit suggestions:
- Bring only the information the IRS requests; don't bring other records "just in case." Also, if the IRS agent goes down a path that isn't included in the audit notice, you can ask that the subject stick to the notice.
- Answer only questions you're asked with only the information needed to answer the question.
- Courtesy counts. "Getting in their face" to show them you're not intimidated is a bad strategy. The IRS agent won't say, "Gosh, if you're upset, we'll just call off the audit."
- Be organized to a fault. Fumbling around for a document will lengthen the process and suggest that if you're disorganized in an audit, you were equally disorganized when claiming the deduction.
- Never give the IRS original copies of your records. Give them copies only.
If you're being audited, it's a good idea to take with you a CPA experienced in IRS audits or a tax attorney. They and the IRS speak the same language.
Audits aren't fun. But they're not a one-way ticket to trouble, either. Follow the Boy Scout motto: Be Prepared.
You may view the original article from the Knoxville News Sentinel here.Share