What is an IRS Audit?

Taxes can be a maze of regulations and forms, and the prospect of an IRS audit can add a layer of anxiety to the process. An IRS audit examines your tax return to ensure its accuracy and compliance with tax laws. At Consult Your CFO, we work with your tax accountants to resolve any audit issues so you can focus on your business. So, what exactly does an IRS audit entail, and how can you prepare for it?

Understanding IRS Audits

An IRS audit isn’t necessarily a cause for panic. It’s a standard procedure used by the Internal Revenue Service (IRS) to verify that the information on your tax return is accurate and matches the data they have on file. There are different types of audits:

1. Correspondence Audit: This is conducted via mail and usually involves specific aspects of your return that require clarification or documentation.

2. Office Audit: You may be asked to visit an IRS office to provide additional information or explain certain parts of your return.

3. Field Audit: An IRS agent visits you in person, usually at your business or home, to comprehensively review your records.

Why Do Audits Happen?

There isn’t always a specific reason why someone gets audited. Sometimes, it’s a random selection, but certain factors might raise red flags and increase the likelihood of an audit:

1. Discrepancies: It could trigger an audit if the information reported on your return doesn’t match what the IRS has on file from other sources (like employers or financial institutions).

2. High-income Individuals: Those with higher incomes often face a higher chance of audit simply because there’s more at stake. According to the IRS, the rate for individuals with an income of $10 million or more is 8.16%. The rate for individuals with an income between $1 million to $10 million is 2.53%.

3. Business Expenses: Claiming excessive or unusual business expenses might catch the IRS’s attention.

4. Home Office Deductions: Claiming deductions for a home office is common, but it’s also an area where errors can occur and raise suspicions.

5. Cash Transactions: Large amounts of cash transactions or discrepancies in reported income can be flagged for review.

What to Expect During an Audit

If you’re selected for an audit, don’t panic. Most audits are conducted via mail, requesting specific documents or explanations for certain deductions or income sources. More extensive audits might involve meetings or interviews.

Here’s what you can do:

1. Gather Documents: Have all necessary documents organized and ready to present. This includes receipts, bank statements, invoices, and other relevant records.

2. Be Transparent: Answer questions truthfully and provide requested information promptly. Honest communication is crucial.

3. Seek Professional Help: Consider hiring a tax professional or accountant like Consult Your CFO. They can guide you through the process and represent you during the audit.

What Happens After an Audit?

Once the audit is completed, the IRS will notify you of its findings. You might owe additional taxes, penalties, or interest if they find discrepancies or errors. However, no further action is needed if the audit confirms your return is accurate.

An IRS audit might seem daunting, but with proper preparation and understanding, it doesn’t have to be overwhelming. Keep accurate records, be transparent in your dealings with the IRS, and seek professional help when needed. Remember, audits are a part of the tax process designed to ensure fairness and accuracy.

If you ever face an audit, approach it with patience and diligence. With the right approach, it can be a manageable process that ensures your taxes are in good order. By assisting companies with their audits, Consult Your CFO can help get the business’s finances in order. Call us today for more information on how to get started!

Get A FREE Consultation

Fill out the form below and someone will get back to you as soon as possible.

"*" indicates required fields

This field is for validation purposes and should be left unchanged.