Best Practices in Handling an IRS Audit
The majority of audits are done via the mail instead of questioning a taxpayer in person. About 1 in 100 individual taxpayers will receive a letter requesting additional documentation or proof of your income or deductions. Small businesses and self employed individuals on the other hand, are more likely to get audited then employed individuals, especially if your adjusted gross income is over $100,000.
What Triggers A Small Business or Sole Proprietorship Audits
Home offices can trigger the audit. But more often than not, if the business is showing losses and if the officer salaries or shareholder compensation of a S corporation are reasonable. For small businesses just getting started, and declaring losses year after year, will trigger the audit. Especially if there is large expenses to the business. The IRS will want to review these deductions.
The IRS Audit Notice
When an IRS audit letter comes in the mail, don’t ignore it. Audit letters will outline what year they question, and the specific item(s) on your return that they are questioning. In many cases, it is specific items like itemized deductions. They will ask for documentation or proof of these expenses that you are taking on your return.
Audit Representation Letter
When you receive the audit notice, call your tax professional, or tax attorney to represent you. You will need to sign an audit representation letter. Your tax lawyer or CPA will contact the IRS and request an extension of the deadline. If you don’t respond by the deadline, they may disallow or automatically “correct” your return, and begin collecting any additional taxes they say you owe.
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Get Your Documentation Together
The rule of thumb is to keep tax related materials for 3 years from the date the return was filed. However, IRS audit statute of limitations is up to six years can be reviewed if a substantial error is found. If you cannot find the supporting documents, then that deduction will be disallowed. Once your documents are compiled, get them to your CPA or tax attorney for them to review and put together a case in support of your claims.
Don’t hide any information, if you made an error, you made an error.. don’t try and cover it up. Your tax professional will assist you in figuring out what needs to be done to correct the mistake, and will address it in their case.
Audit Representation Cost
If you are being subjected to a in-person audit, it’s in your best interest to hire a CPA or tax attorney to represent you. They know the tax codes, and how to address any issue that may arise during the face to fact meeting. The cost of this is going to vary between tax and CPA firms, the difficulty of the filing, and the estimated time of preparation and presentation. In any case, it’s going to cost you money. You should ask your tax professional for an approximation of cost.
If you own money, you’ll generally get a bill in the mail and typically it’s due within 30 days, unless you have asked for a payment plan. If your return ends up needing to be changed, then you will typically have 90 days to comply.
If you disagree with the audit, you can request an internal review, or appeal in US Tax Court. However these are expensive, and you have to determine if the potential cost is worth the expense, time and anxiety you will face going through this process.
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