Understanding IRS Tax Audits and How to Prepare for It

If there’s one thing that both individuals and businesses dread the most, that’s an IRS audit. This process can happen to anyone regardless of the nature of your business or how big or small your operation is. While having some tax problems when you’re still struggling as a business owner is probably the last thing you’d want to happen to you, it’s not really the end of the world. By knowing what to expect and what preparations to undertake, you have nothing to worry about an IRS audit. Here’s a simple guide to give you an idea of what happens when you receive an IRS notification letter in your mailbox.

What is an IRS Audit?

An IRS audit is a process where an auditor employed by the federal government takes a close and thorough look at all your financial records. This is done to verify that what you reported on your tax returns is correct and true. You also need to remember that an IRS agent substantiates that the amount you paid to the Department of the Treasury is accurate.

One of three things will happen as a result of the audit conducted on your business: you will either owe the government money, or the government will owe you money. The third outcome is that the auditor will just accept the tax return you initially filed, meaning there’s no correction whatsoever to your returns. 

What’s the Reason for Being Audited?

If you happen to be selected for auditing doesn’t actually mean there’s a problem, although that’s what most people assume to be the reason. In actuality, there are two selection processes used by the IRS to choose which individuals or businesses to audit.

  • Random Selection and Computer Screening – Sometimes, returns are selected based solely on a statistical formula. The IRS will compare a particular tax return against “norms” for similar returns. These “norms” are established from audits of a statistically valid random sample of returns as part of the National Research Program conducted by the IRS.
  • Related Examinations – The IRS tends to notice returns that have any “red flags” or issues with other taxpayers, such as business partners or investors whose returns were already selected for audit.

Once a return has been selected through these two selection processes, an IRS auditor will review the return. If there’s something questionable like unusual deductions, omitted items, or mistakes, then an audit will be initiated.

What to Expect and How to Get Ready?

There’s really nothing to worry about as long as you’re not doing any questionable business practices. Here are several ways to prepare yourself for an impending audit.

Before the Audit – Once you’ve received an audit notification by mail, you need to prepare the documents needed for the audit. Some of the paperwork you need to prepare include receipts, bills, canceled checks, legal documents, loan agreements, and employment documents. Ask your auditor if they accept electronic records in lieu of physical copies.

During the Audit – Once your records are in order, you can retain the services of an accountant as your representative to handle all requests made by the auditor. In fact, you should hire an accountant as soon as you get the notification so they can review your books. The auditor will ask background questions regarding your personal information as well as your business. They’ll ask about your income, any inheritance, and other fund sources.

After the Audit – The auditor then will give you one of the three outcomes mentioned above. If you agree with their findings, you need to sign the examination form and pay what’s due, if there are any. If you happen to dispute the results, you should request a meeting with an IRS manager.

Conclusion

Those are just some of the things to expect and remember when you’ve been selected for an audit. If there’s anything you should remember, it’s that audits are nothing to worry about, especially if you’re diligent in filing and keeping track of all your financial records.

Axiom Tax Resolution Group is your trusted partner when it comes to sorting out your tax problems. We help our clients with our tax resolution services by offering permanent solutions to avoid having any issues with their taxes. When you work with us, you’ll never have to worry about being audited by the IRS. Contact us today to get started!