Audit
Understanding IRS Audit
An IRS audit is a thorough review or examination of an individual’s or organization’s financial information and accounts. The IRS Examination checks to see if the information on your tax return agrees with your books and records. The IRS first verifies that the transaction actually occurred and then checks to make sure it was reported according to the tax laws and the tax liability reported on the tax return.
Why Did You Receive an Audit Notification?
Receiving an audit notification from the IRS does not necessarily mean there’s a problem. The IRS uses several methods to select returns for audits:
- Random selection and computer screening – In some cases, returns are selected purely based on a statistical formula. The IRS compares your tax return against “norms” established for similar returns. These “norms” are developed from audits of a statistically valid random sample of returns, which is part of the National Research Program conducted by the IRS. This program helps the IRS update return selection information.
- Related examinations – Your returns may also be selected if they involve issues or transactions with other taxpayers, such as business partners or investors, whose returns were selected for audit.
After the selection, an experienced auditor reviews the return. They may accept it as-is, or if they identify something questionable, they will note the items and forward the return for assignment to an examination group.
What’s Next?
If you’ve received a notification about an IRS audit, don’t panic. It’s important to understand that filing an amended return does not affect the selection process of the original return. Also, receiving a refund is not necessarily a trigger for an audit.
Amended returns also go through a screening process and may be selected for audit. If your return is selected, it’s crucial to cooperate fully with the audit process and provide all requested information.
It might be beneficial to seek the assistance of a tax professional who can guide you through the process and represent you during the audit. Always respond to the IRS promptly and keep organized records to help make the audit process smoother.
Remember, an audit is simply a review of your financial information to ensure accuracy. It’s not a criminal investigation; in many cases, it can be resolved swiftly with the proper preparation and response.
Source: IRS
Essential Documents Required During an IRS Audit
You may be asked to provide certain records and documents for review during an IRS audit. If you enlist the help of a tax professional, they will need the same information. Here are some examples of records that might be requested:
- Receipts – Organize these by date and include notes on their purpose and how they relate to your business. Some receipts can also serve as evidence of mileage.
- Bills – These should include the payee’s name, the service type, and the payment dates.
- Canceled Checks – Group these with copies of the corresponding bills and any related employer reimbursement.
- Legal Documents – Include a brief explanation of the case, the timeline, and its relevance to your business, credit, or deduction. This could include divorce settlements, criminal or civil defense papers, property acquisition documents, or tax preparation advice.
- Loan Agreements – Provide a copy of the original loan agreement, including borrower names, property location, lending institution, loan amount, repayment terms, and settlement sheet. If the loan was from a non-institutional source, provide a statement from the payee indicating the interest paid that year, along with their address and Social Security number.
- Logs or Diaries – These can indicate travel details, gambling winnings and losses, or job-hunting activity and expenses.
- Tickets – Label travel tickets with the business purpose and group them with other receipts from the same trip. Lottery tickets can provide proof of profit or loss.
- Medical and Dental Records – Include medical savings account statements, physician statements, capital improvement records for medical purposes, and contracts for attendant care.
- Theft or Loss Documents – These might include insurance reports, police reports, photos or videos showing damage, appraisals from a qualified adjustor, and a brief explanation of the loss.
- Employment Documents – This could include uniform policies or dress codes, continued education requirements, W-2 reimbursement statements or policies.
- Schedule K-1 – This form reports each shareholder’s share of income, losses, deductions, and credits when an S corporation files its annual tax return.
Remember, you should only send copies of these documents, not the originals. A description of its surrounding circumstances should accompany each document to provide context.
To safeguard your rights during an audit, contact us at 858-740-7434. Alternatively, you can fill out our contact form HERE. Please provide a comprehensive description of your situation, and a tax professional will contact you shortly.
