The word “audit” will make any business owner tense, especially when discussing or going through a tax audit from the IRS. However, there are strategies that taxpayers can use to help navigate an audit.
In this blog, we’ll break down the auditing process so that you understand what an audit is, why you may be audited, what happens, and what to expect during an IRS audit if you’re facing one in the coming year.
Let’s start with the basics. An audit is a review of your tax forms and financial documents. Its purpose is to double-check that you’ve properly filed your taxes and abided by tax laws. Audits do not happen every year. For example, only 0.4% of individual income tax returns were audited in 2019. The IRS selects randomly, through a computer screening, or when other related examinations have shown issues (such as the tax returns of a business partner or investor). Those issues can be as simple as a typo or mathematical error on a form, or as serious as failing to disclose taxable income or neglecting to report cryptocurrency transactions. (Using an accountant to file your tax returns can decrease your chances of simple computing errors.)
The IRS will only notify you by mail if you are selected for an audit. A legitimate IRS audit will be conducted by mail or through an in-person interview at an IRS office, at your home or place of business, or at your accountant’s office.
They will never call, text, or email. Any of the aforementioned communication methods are not legitimate, so if someone reaches out via these methods, do not send them any of your information.
The written request will list specific documents auditors wish to see. To determine how to submit your documents, check the IRS website for a list of documents accepted electronically.
Once the documents are reviewed, the audit can be completed in three ways: no change, which indicates your filing does not need to be amended; agreed, where you accept the changes proposed by the IRS; or disagreed, in which case you disagreed with the changes proposed. If you reach a disagreement, you may request a conference with an IRS manager, schedule mediation, or file an appeal.
The worst thing you can do is ignore the audit. This can result in additional taxes owed, and result in fees on top of any fees you may owe as a part of the audit. An IRS audit can also impact your state tax return, so it is important to comply with the audit to the best of your ability as quickly as possible.
If you are concerned about being audited, contact our office to review your books. At DMA, our goal is to make sure your books are accurate, up to date, and properly filed with state agencies and the IRS to reduce your chances of an unfavorable outcome due to an audit.