If you’re like many American taxpayers, rather than experiencing feelings of peace and accomplishment after filing your taxes, you can’t shake the underlying fear of a tax audit. The reality is that no matter how small the chances are, there is still a real possibility that you could be chosen for an audit. But don’t panic, you only have something to fear if you’ve intentionally falsified your taxes or are guilty of tax evasion fraud, which is not the case for the average American taxpayer.
Take comfort in knowing that tax auditing is not unfamiliar territory for tax prep professionals like the amazing team at Waters Hardy. Even if you’re never chosen for a tax audit, having the information about tax auditing helps ease the mind and makes the unknown seem familiar and manageable if and when the time comes. Audits are routine, so it’s a good idea to always prepare if it does happen. However, should you be chosen for one, our Waters Hardy team is ready to offer expert advice and walk you through the entire process, step by step.
What is a Tax Audit?
Simply put, a tax audit is an examination of your tax return by the IRS to verify that your income and deductions are accurate. On average, only 0.4% of all individual income tax returns are audited each year. If there are discrepancies between your tax return and the paperwork the IRS has received from your employer, or other sources, it may initiate an audit or examination.
The IRS generally has three years from the due date of your return to initiate an audit. The IRS could audit up to six years later if you understate your taxable income by more than 25%. If you file a fraudulent return or don’t file at all, there is no statute of limitations on when the IRS can conduct an audit.
Reasons You May Be Audited
- While most tax audits are targeted, there is a small chance you could be randomly selected for an audit.
- If your return is connected with another taxpayer’s return that was audited, you may also be audited.
- Failing to disclose taxable income
- Neglecting to report cryptocurrency transactions
- Making Typos
- Using lots of round numbers
- Making math mistakes
The IRS Will Notify You if Your Are Being Audited
Most IRS audits are conducted through the mail and are relatively routine. The IRS sends a letter requesting additional documentation to support a deduction or other tax break you’ve taken. If you mail back sufficient evidence, your case will close with no taxes owed. Otherwise, the IRS will mail you a bill.
Experts suggest that once you receive notice you’re being audited, don’t ignore it. Pretending that it doesn’t exist won’t make the audit go away. Ignoring an IRS audit could eventually cause you to owe additional taxes and your bill to go to collections. It could cost you more in penalties and fees down the line.
Three Types of Audits
- This is most common and conducted via writing and not face to face with an auditor.
- In this case, the amount of taxes being audited is usually 10 times higher than the average for a correspondence audit. Expect to meet with an auditor in person, at an IRS office.
- The auditor may come to your place of business or records office.
Things to Know When Completing a Tax Audit
Get Professional Help
- If you’re nervous about dealing with an IRS audit on your own, seek professional help from companies that have expert experience in tax planning and compliance.
- The key to success is being well prepared. The better organized your records, the more smoothly things will go.
Appeal the Decision
- Once the audit is over, the auditor will send you an examination report detailing their findings and outlining how much, if anything, the auditor believes you owe in back taxes and penalties.
- You can either agree with their conclusions and sign the examination report, dispute it, or file an appeal and/or possibly have your case heard in tax court.
- Be honest, reasonable, and professional with your auditor, and you should get the same treatment in return.
Reconstructing Records for the IRS
Lack of records often leads to a 20% IRS negligence penalty. Fortunately, your records don’t need to be perfect. If you can reasonably explain how you came up with a figure that’s not fully corroborated by the evidence, the IRS may well accept it.
However, when you’re pulling together your records, here are some things to remember. The more thorough your documentation is in general, the greater the likelihood of an IRS agent accepting your reconstructions. Professionals that provide tax planning services can help when you can’t get access to all the records the IRS may be asking for.
Tips to reconstruct your records:
- Review bank statements and credit card statements. They are usually a good list of what you paid. They may also be a good substitute if you don’t have a receipt.
- Vendors and suppliers may have duplicate records. Reach out to them if you need a copy.
- Appointment books can provide backup information about travel, number of clients, and frequency of service.
- Cell phone records can help establish dates of service or assist in reconstructing expenses.
- You may be able to reconstruct a reasonable mileage argument with online map tools. Consider periods of no travel, too.
Most importantly, get to work immediately to reconstruct the items. It can take a while to put all or part of the pieces together, so start right away to meet your IRS response deadline. Ignoring an audit or tax bill won’t make it go away. So, delaying repayment could result in penalties, interest, and other fees. If you’re struggling to pay taxes owed, tax payment relief options are available.
Waters Hardy is Ready to Help with Your Tax Audit
Regardless of why someone might be chosen for an audit, it can be quite a shock to learn that the IRS wants to examine a return. Even if you have no reason to think you did anything wrong, you can’t escape the anxiety that accompanies an audit notice. However, if you’ve kept careful records and have been honest with the IRS, you don’t have much to worry about. Just cooperate, be prepare your documentation, and everything will turn out fine.
Also, if you do happen to be audited, our experienced Waters Hardy tax accounting services team is here to help you come out on the other side of the process with confidence and peace of mind. It doesn’t have to end there, though. With our help, you can get back on track and maintain comprehensive record-keeping, giving you the security of being supported by expert tax prep professionals along the way. Contact us today!