Sometimes it can seem like nobody up there likes you. An audit from the IRS is, for example, a seemingly random event that ends up causing you generous amounts of stress, fear, and frustration. In all likelihood, you’ve probably never even been audited before anyway – you have no idea what to expect, you just know this is going to be an unpleasant and drawn-out experience and you’d prefer if it all just went away. The key to overcoming these feelings is two-fold: one, understand why you were chosen; and two, understand what you can do to resolve your audit as quickly and efficiently as possible.
Math is Fundamental
These days, everything is done by computer. Your tax return isn’t being pored over by some poor bureaucrat hidden away in Washington; instead, it is given to a computer to process. That computer then assigns a score to your tax return, determined by your deductions and how above or below average they are. When you take deductions that are different from what most people take, your tax return’s score is affected.
We don’t have much information on the scoring system being used, but we do know a few of the data points that can make your score rise. A low gross profit margin, high automobile expenses, a high use of automobiles in your business, the number of automobiles in your business, a high amount of travel and entertainment expenses, and little to no profit from your business’s operations can all increase your score, which translates into arousing the IRS’s suspicions and/or interest.
Many Audits, Many Reasons
There are four different kinds of IRS audits that you can expect when you’re audited. The simplest is the Correspondence Audit, which is a letter from the IRS that will request your canceled checks and receipts to verify the deductions you listed on your return. Unfortunately, as simple and non-threatening as this audit is, it is unlikely your business is going to be audited in this way.
An Office Audit identifies several particular items on your return and then requests that you send a representative with specific documents to a local IRS office so that the auditor can examine those documents. Small businesses with sales under $500,000 typically find themselves the subject of this kind of audit.
A Field Audit is what you see on television most of the time. In this kind of audit, an IRS agent personally calls the owner, president, or general partner of the business and informs them that they are being audited. The agent will typically conduct the audit at the place of business, instead of at an IRS office. Incorporated businesses and partnerships are generally audited in this way.
Random Audits are possibly the most obnoxious of all audits, because they occur when an IRS agent is sent out to a random taxpayer to review their return. They aren’t looking for anything specific, and will often not even review the entire return.
Know Your Rights
During your audit, you have several rights as outlined by the IRS’s website:
1. The right to professional, courteous treatment by the IRS’s employees.
2. A right to privacy and confidentiality about tax matters.
3. A right to know why the IRS is requesting information and how the IRS will use that information, as well as what will happen if said information is not provided.
4. A right to representation, either by oneself or by an authorized representative.
5. A right to appeal disagreements within the IRS and before the courts.
Point four is of particular importance; in all likelihood, you are not trained to handle an audit. While you may have your finances under control, an audit can often be a far deeper analysis of your financial situation than you are prepared to undertake. Thus, many people turn to a tax service to represent them during an audit and provide counsel when necessary as far as dealings with the IRS are concerned.
Of course, if you decide to dispute the audit’s findings, you are going to need more than a skilled team of accountants (although that doesn’t hurt); you’re going to need the tax professionals at expatriatetaxreturns.com to get the best possible results for you and your business. With the right help – and the right knowledge to get that help – an audit doesn’t have to be something to fear.