Few things strike fear in small business owners' thoughts more than an IRS tax audit. Although only about 2.5% of us are ever audited, small businesses don't have the time or resources to prepare for this dreaded encounter. Even knowing that you have performed all the checks and balances to ensure that your return is correct doesn't always mean you feel confident in the midst of an audit. With decades of experience, Chandler & Knowles CPAs is the best choice to help you with your audit and all your tax needs.
Reasons Why the IRS Will Audit You
There are many myths about why the IRS chooses to audit you. The truth is that while there are often red flags, sometimes it is just a random audit. The IRS conducts random audits to test its own procedures and due diligence. Small mathematical errors, filing late or early in the season, claiming deductions, or filing online or with an accountant are not typical reasons for an audit. Returns that feature the following are more likely to be reviewed:
Extremely high or low-income returns may present a reason for auditing. For instance, people who make over $1 million are more likely to be audited than middle-income companies or families. On the opposite end of the spectrum, individuals who file using the Earned Income Credit and make less than $25,000 are audited about 3.2% of the time.
A business that consistently reports high losses over several years is always a red flag. After all, why would you continue to put in the effort if you never make any money? The IRS understands that a newer company may not turn a profit immediately, but the end goal should be to get in the black.
Traditionally, it is easier to hide income when dealing with international banks. Even though international relations have improved over the years, some areas still do not allow financial access to the U.S. About 3.4% of International returns resulted in an audit in 2018.
Schedule C Filers
Schedule C filers are more likely to be audited if over $100,000 in income is reported. This is because most companies that reach that type of income level become a corporation or an LLC.
Radical Income Changes
If you made $500,000 last year but only $50,000 this year, it constitutes a radical income change. There may be a perfect explanation, but the IRS could question the difference.
What Happens During An Audit
The IRS agent will review all the information and determine if further documentation is needed or if a revised return needs to be done. It may be wise to bring an accountant with you to address any questions or concerns that arise.
Types of Tax Audits
The IRS does several types of audits. These include:
- Correspondence or mail audits are done via the mail system. The IRS may ask for an excluded form, copies of receipts, or a mileage log. It is a good idea to use certified mail to confirm that the information is received.
- A meeting at an IRS office is generally done when more documentation is required than is easily mailed.
- Field meetings take place at your home, business, or accountant's location. These are normally a more intricate audit involving more paperwork than is possible to take to an IRS office.
What Documents Will I Need For An Audit?
The good news is that the IRS will tell you exactly what they want to audit, and you will be given 90 days to comply. Normally you can ask for a 30-day extension if you run out of time. When meeting with the representative, make certain you have all the requested information to avoid the need for additional meetings. Some items they may request are:
- Logs or diaries
- Proof of income such as W-2. K-1, 1099s
- Canceled checks
- Loss or theft information
- Loan agreements
- Legal paperwork such as divorce papers, sale of assets, custody, and alimony agreements
What Can I Expect After An Audit?
About 90% of audits result in the need for an amended return. There are three possible outcomes of your audit — an amended return will be required, the return is deemed correct, or the return is found to be incorrect, but you disagree. If you disagree with the changes, an IRS Manager will meet with you to discuss the findings. You can file an appeal if you continue to disagree.
In recent years, scam artists have used phone calls, emails, and texts to pretend to be the IRS and obtain financial information. Always remember that the IRS will only contact you via US mail. If you have been notified that an IRS audit is being conducted, let Chandler & Knowles CPAs assist you. Our firm offers various services for businesses and individuals, including bookkeeping, payroll, tax and financial planning, accounting system implementation, and forecasting. Contact us today to get started.