If you have any questions about avoiding an IRS audit or getting help if you’re about to have one, call G-Tax.
When you receive a letter from the Internal Revenue Service telling you that they’re going to audit your business or personal tax returns, it can send a shiver of dread down your spine. The purpose of an IRS audit is to examine your returns for errors or omissions. The IRS can be relentless when pursuing taxes owed, which is why so many people fear the process.
In some cases, an IRS audit determines whether you’ve purposefully or inadvertently committed any tax fraud. Most cases find nothing erroneous, but because of their methodical processes, the IRS will find any problems and mistakes you made when filing your return. Rely on an experienced tax accounting firm. Prepare and file your taxes
Perform a voluntary small business tax audit before the IRS even sees your return
Provide tax representation in the event of an audit
Help you with tax resolution services to resolve your tax disputes
Negotiate a payment plan or an Offer in Compromise
Stop a tax levy, wage garnishment or property seizure
THE IRS SELECTION PROCESS
The IRS uses several different techniques to determine whether to audit your return:
- Third-party documentation, which verifies the information you’ve provided on such forms as your W-2s or 1099s. The IRS compares and matches the figures you reported with the ones submitted by your employer and other sources. If the numbers don’t match, your return may face further scrutiny.
- The Discriminant Index Function (DIF) system, which detects and analyzes anything odd or not in agreement on your return. If your return receives a high DIF score — meaning a large amount of discrepancies are found — your return could be chosen for further examination.
- The Unreported Income Discriminant Index Function (UIDIF) system, which uses a series of calculations to determine whether your return has a high probability of unreported income. Returns with a high UIDIF score, in addition to a high DIF score, have a strong likelihood of being selected for further review.
- Random selection, which means that the IRS chooses a certain portion of tax returns to audit totally at random. Random IRS audits tend to be the most time-consuming and extensive of the reviews. Random selection has generated a lot of controversy over the years — it was even stopped during the early 2000s — because they were perceived as being intrusive and punitive in nature.
Because the IRS can audit almost any tax return in any given year, it’s best to have your tax return processed by a professional. This reduces the likelihood that you have to face the stress and worry of IRS audit. In fact, most tax professionals advise that you never speak to the IRS by yourself. They know the tax laws better than you could. When you hire expert tax accountants, they handle everything for you.
IRS RED FLAGS
Regardless of the selection process, there are several ways your return can trigger an IRS audit:
- Employ care and diligence when preparing your return. Common mistakes — like the wrong name or Social Security Number, misspellings and missing information —can trip you up.
- Too many zeroes. Pay attention to details and don’t gloss over inaccurate or missing information.
- Previous IRS audit. Your return may be audited if you’ve been audited before. Although controversial, it may be true that once you’re in the system, the chances increase that it’ll happen again.
- Unscrupulous tax preparer. If your tax preparer fudges the numbers on your return or is too aggressive with deductions, it can trigger an audit.
- Large changes in income. The occasional windfall is one thing, but if a pattern emerges in the spikes of income, the IRS takes notice.
- If your return gives you a large refund in conjunction with a net operating loss for your business, that’s a red flag.
- International transactions. The use of foreign banks and income from foreign trusts tend to make the IRS nervous because they’re often unable to track the assets or income.
- Taking a little cash off the top of your recorded profits definitely catches the eye of the IRS.
- Essentially, stealing from a business you may be working for. It’s a crime.
- Fraudulent transfers. Frequent cash transfers may trigger a red flag because those transfers are very hard to track. Insist on good recordkeeping from your financial partners.
- Self-employed. You’re more likely to be audited as a self-employed businessperson, due to the complexity of small business tax returns. Good recordkeeping and attention to detail make things much easier for you and the IRS to track.
In addition to the red flags above, the IRS commonly targets high wealth businesses and individuals like yourself. Tax returns that reflect $1 million or more in income make up almost a third of all IRS audits.
TAXPAYER’S RIGHTS
If your return has been chosen for IRS audit, you’re informed of your rights. Each state has its own version of these rights, but if your federal return is being examined, these rights are universal:
- You have the right to professional and polite treatment by the IRS.
- Privacy and confidentiality on the matter of your taxes is guaranteed.
- You have the right to know why the IRS is auditing your return, how they use your information and what they’ll do if you do not comply with their requests.
- You have the right to represent yourself or be represented by someone else authorized and certified to represent you in this situation.
- You have the right to appeal any decisions made by the IRS, within the IRS system or in court.
- You have the right to all information about any changes that the IRS wants to make on your returns.
- You are only required to provide the information specifically requested for the IRS audit of a specific year.
Sometimes, the IRS may send a Notice for a Joint Audit, which involves examining a business or personal return involving two or more states. When this happens, the IRS can examine multiple state returns as one to get a better overall picture of your income and check for inconsistencies. If you have any questions about avoiding an IRS audit or getting help if you’re about to have one, call G-Tax.
