With just one month left to file your taxes, the 2023 tax filing season is approaching its end. Filing taxes can be stressful and time consuming. However, the risk of pushing your taxes off to the last minute or rushing through them can have serious consequences. The Internal Revenue Service (IRS) can audit tax returns for accuracy and reporting needs.
If you are a business owner doing your own tax preparation or accounting services, then pay close attention. There are different reasons why the IRS may flag your tax return for an audit.
Here you will learn what a tax audit is, how and why the IRS completes them, and what your options are if your business taxes are audited. It is important to learn about tax audits before they happen to prepare if you are audited. Let’s get started.
What is a Tax Audit?
A tax audit is when the IRS reviews your individual or business tax return for accuracy. The government audits your tax return to ensure you paid the correct amount of taxes owed concerning your reported income. Tax audits do not happen often. In fact, the IRS audits less than 1% of tax returns filed every year.
You may be audited at random, by computer screening, or by an association of others subject to an audit. For instance, you can be subject to an audit by the IRS if an affiliated business partner is subject to review. The best thing you can do when filing is triple check your return for accuracy and ensure no information is missing. Missing or incorrect information is typically the biggest red flag that would cause a tax audit.
Another thing to note is that if you are audited and the IRS finds substantial errors, they may pull older returns (3-6 years back) for further audits. Pulling older returns may prolong or worsen the audit process.
Red Flags that Can Result to Tax Audits
Tax audits can occur at random, but the following red flags cause targeted auditing:
- Missing or incorrect information
- Avoiding tax payments or incorrect tax payments
- Missing, incorrect, or non-reported taxable income
- Credits and deductions taken don’t line up with reported income amounts
- Round numbers (reported by businesses)
- Large increases in income
- Large charitable donations as write-offs
- Multiple self-employment losses
- Early retirement payouts or withdrawals
- Gambling wins and losses
- Marijuana businesses
- Failing to report foreign bank accounts or major foreign transactions
- Not paying quarterly taxes
- Anything else that comes up as suspicious activity on your return
Even if your reported information is correct, the above situations may still be red flags to the IRS, causing them to audit your tax return. Always keep your receipts and returns in case this happens. Also, you should know that if you are a small business owner or LLC, the IRS may subject your returns to closer scrutiny.
IRS Audit Process
The IRS audit process is simple. First, you get a detailed letter stating you are being audited in the mail. The letter will include personal information, which you should verify as correct, and the timeframe in which you must take action.
The IRS will not call or email you about an audit as the primary or initial source of contact. There may be instances in which information can be rectified over the phone or online, but you will always get that first notification via certified mail. In rare cases, you might be audited in person.
Read the letter when you receive it and follow all necessary instructions that the letter includes. Unfortunately, even if nothing on your return needs to be modified, you will still need to follow the process until the IRS closes your audit. Failure to comply could result in financial and/or criminal penalties.
What Happens if You Are Audited?
You will know if the IRS is auditing you. You will have to comply with what they ask you to do. The quicker you comply, the better off you will be. If you are uncooperative or defensive, you risk raising more red flags and further investigation. You will often need to provide requested documentation or other information so that the IRS can complete your audit.
What Information Will You Need to Provide to the IRS?
The IRS will tell you what you need based on your specific return, business, and audit. Common information requested for tax audits includes:
- Receipts
- Bills
- Checks
- Loans
- Contracts
- Tickets
- Legal documents
- Medical records
- Employment verification
- Tax documents
- And more
The length of your audit process will depend on your unique situation and the information needed to close it out.
What Can You Do if You Agree or Disagree with the Tax Audit?
The audit will conclude in one of three ways:
- No changes – everything is good to go, and no changes are necessary.
- Agreement – information changes, and you and the IRS mutually agree upon those changes.
- Disagreement – you disagree with the IRS’ proposed changes.
If you agree with the IRS auditor and their proposed changes, you sign the examination report as an agreement contract and pay any necessary taxes owed to the government. The audit will then be completed.
If you disagree with the IRS auditor, you may request a meeting where you then go through mediation or file an appeal.
Professional Tax Services Can Help – Tax Audit and More
Professional tax preparation and accounting services can help make your tax life much easier. Here at Waters Hardy, that is what we strive to do! Our team of tax, accounting, and finance experts can assist you every step of the way, so you don’t have to worry about the nuances of tax filing.
If you find yourself in a tax audit situation, we can help you through the process. We can also help you with tax preparation to avoid the risks of getting audited. Either way, we can support your business through all necessary tax preparation and accounting services.