How outsource accounting prepares clients for IRS audits
Many business owners shudder at the thought of an IRS audit. To be honest, it’s no fun but it’s also not the end of the world. Have you ever been asked by your mom “What’s behind your back?”, knowing the whole time you have that cookie you were not suppose to take in your hand? All of a sudden, your heart races and your palms sweat (making it a doughy mess in your hands, by the way) and soon you start squirming.
IRS audits can be the same way if you aren’t sure what are in those shoe boxes full of receipts – or the lack thereof! We came across 4 vital questions our clients have asked in the past that can make your next audit like feel like a walk in the park.
1. What triggers an audit anyways?
If you have a sole proprietorship you are more likely to be audited.
If your charitable contributions are a higher percentage of your income than is standard for your income level. Actually if any of the various itemized deductions are significantly high for your income level, it could trigger an audit.
You might be “audit bait” if any of your itemized deductions are significantly higher for you then they have been in the past.
If you have previously been audited for unreported income for which the IRS has received 1099 or other income statements, or if the IRS has audited you in the past and had significant changes to your return as filed, you are more likely to come under their scrutiny again.
There are also compliance audits which are just about being randomly selected by the IRS. You could have been reported for a specific violation by a disgruntled employee, co-worker, or business partner.
2. Do I have any choice in the matter?
We found out you have plenty of choices in the matter. Consider these options:
A right to privacy and confidentiality about tax matters.
A right to know why the IRS is asking for information, how they will use it, and what will happen if you do not comply
A right to representation, by oneself or an authorized representative
A right to appeal disagreements, both within the IRS and before the courts.
Payment of only the correct amount of tax.
Relief from certain penalties and interest
3. What do I need to have for the audit?
Before you start the process, here is what you need to have in your possession:
The audit letter
A copy of the tax return
Backup documentation as requested
Make sure documentation is labeled and legible
4. How far back in time can an audit go?
Generally, the IRS can include returns filed within the last three years in an audit. Additional years can be added if a substantial error is identified. Generally, if a substantial error is identified, the IRS will not go back more than the last six years.
The IRS tries to audit tax returns as soon as possible after they are filed. Accordingly most audits will be of returns filed within the last two years.
If an audit is for an older year, you may be requested to extend the statute of limitations for assessment of your tax return. The statute of limitations limits the time allowed to assess additional tax. The statute of limitations is generally three years after a return is due or was filed, whichever is later. There is also a statute of limitations for making refunds.
If the audit is not resolved and the statute of limitations date is nearing, you may be asked to extend the statute of limitations date. This will allow you additional time to provide further documentation to support your position, request an appeal if you do not agree with the audit results, or to claim a tax refund or credit. It also allows the IRS time to complete the audit and provides time to process the audit results.
You do not have to agree to extend the statute of limitations date. However, if you do not agree, the examiner will be forced to make a determination based upon the information they currently have. Therefore, the examiner may not be able to consider additional adjustments, such as expenses, that could lower the amount of tax due.
If you need help or more information about an the audit process please see a tax specialist. Need help getting your books in order? We can help! Call us at 918.928.7288! LUXA Enterprises is an outsource accounting firm based in Tulsa, OK. To get more helpful bookkeeping advice visit our blog where we discuss this and more on Tulsa bookkeeping.