The Essentials of IRS Audits
Most people enjoy surprises from the traditional surprise birthday party to an unexpected gift from a co-worker, client, friend or loved one.
Often surprises are fun and welcome, but this is not always true. The worst type of surprise a taxpayer can receive is an IRS audit. When taxpayers receive notification they immediately assume the worse and quickly transition into a state of panic and anxiety. The good news is that less than 1% of all taxpayers (individual and corporate) will be selected for an audit. However, when the audit notification arrives there are steps that can be taken to prepare the taxpayer for what is coming next. To help clients, prospects and others understand IRS audits better and preparation steps to take, Hanson & Co. has provided a summary of key information below.
Types of IRS Audits
Most taxpayers are surprised to learn there are diverse types of audits which can be initiated by the IRS. Depending on the circumstances of your situation, the IRS may elect to use any one of the four. These audit types include:
Correspondence Audit – This is the most common and least complex auditing procedure that the IRS uses. During a correspondence audit, the taxpayer will receive a written correspondence from the IRS with specific questions about their tax return or supporting financial information. The letter will contain specific information about the issue and what additional information may need to be furnished to the IRS. In many cases, the result is that the taxpayer needs to make a correction on their tax return and pay an additional fee or receive an additional refund. This type of audit is generally resolved very quickly and is limited to one or two key issues.
Office Audit – This type of audit is more serious than just a correspondence audit because it requires the taxpayer to appear in person at an IRS office. When a notice for an office audit is received there will be specific details about the records and other information the IRS would like to review and discuss during the visit. Often, an IRS agent simply wants to review supporting documentation to ensure the proper reporting of expenses and other items on the taxpayers’ filings. It’s important to stick to the items outlined in the letter and provide only the requested documentation during the office visit. It’s common for taxpayers to retain a Certified Public Accountant (CPA) to accompany them on the audit and be available to answer questions posed by the agent.
Field Audits – This is the most serious type of audit because the IRS is coming to your office or place of residence to review financial records. An agent will visit your place of business and make specific inquiries about various details of your tax returns and financials. If you are selected for a field audit then it’s essential to hire a CPA or other professional to represent you through the process. This will ensure that all questions are properly answered without giving unnecessary exposure to potential issues.
Preparing for the Experience
Below are some tips for preparation, including:
Meeting Location – If you have been selected for a field audit the best thing you can do is not to have the IRS come to your home or office. Select a neutral location where you feel as comfortable and in control as possible. The last thing you want is IRS agents roaming around your office or talking to employees which could end up expanding the scope of the audit. Better to keep it as plain and simple as possible.
Organize Documentation – The IRS will commonly request items such as past tax returns, financial statements, receipts and other such information. Come prepared. Be ready to share with them the information they have specifically requested. However, it’s important not to give them more than is necessary because doing so could result in and expanded audit. It’s best to consult with your CPA or other representative to identify what documentation should be immediately available.
Answers Answers Answers – The IRS will inquire about items on the tax return that are of interest to them. On occasion, these questions can be very sensitive and may serve to confuse you. Be ready and able to defend what is in your tax return and do so without acting as if something is wrong or has been concealed. Preparing ahead of time with your representation will make it easier when the tough questions are asked to speak clearly and articulate a reply. Remember, answer only the question you are asked and refrain from going into significant detail unless directly requested.
An IRS audit can be a challenging experience that requires patience and preparation to endure. If you are selected for an IRS audit it’s essential to be prepared as possible which includes hiring a qualified professional to represent your interests. If you have questions about IRS audits or need assistance with an existing audit, Hanson & Co. can help. For additional information please call us at (303) 388-1010, or click here to contact us. We look forward to speaking with you soon!