Charitable deductions, business expenses and deductions for working at home can be warning signs for the IRS, especially if they're not commensurate with your income or last year's return. The IRS administers audits by mail or through an in-person interview to review your records. The interview can be conducted at an IRS office (office audit) or at the home, establishment, or office of the taxpayer's accountant (field audit). Remember that we will initially contact you by mail.
The IRS will provide you with all contact information and instructions in the letter you will receive. While the chances of being audited are rare, it's helpful to know what triggers the IRS. Here are 10 auditing triggers and tips for being audited. Many business owners will need to file a Schedule C to report business income as part of their individual tax returns.
This is true of sole proprietorships, which constitute the majority of small businesses. Annex C will show your company's profits or losses, but will also include your profitability in the stack most likely to be audited. Frankly, there's nothing you can do about this other than making sure you have the proper documentation for all your claims. In fact, you can be audited by the IRS, even if you've already received a tax refund.
If you are chosen for an audit, consider whether you want to enlist the help of a tax professional to navigate the process. The most important thing is to respond quickly to requests for documentation or other information from the IRS so that the audit can be resolved as soon as possible. If you end up having to pay more taxes, try to pay them as soon as possible to minimize the penalties and interest you owe. Old brokerage accounts are often overlooked, as are Form 1099 and distributions from a college savings account to pay tuition.
The IRS exam or audit process begins at one of ten service centers, which depends on the taxpayer's location. Service centers receive taxpayer returns; service center representatives enter tax return data. There's not much you can do to lower your chances of an IRS audit because the formula for calculating who is audited is not common knowledge. While the IRS won't audit everyone who has assets or transacts internationally, your risk of an audit may increase if you do so.
If your company shows no profit for most of the past few years, the IRS may call you to determine if you are actually conducting a true commercial venture. If the agent is forced to prepare a “T for cash”, which represents a simple source and application of fund analysis, then the agent will look for options that include questioning the taxpayer and indirect methods. If you agree with the findings of the audit, you will be asked to sign the exam report or a similar form, depending on the type of audit performed. You can bring in a CPA or other tax professional to represent you, which may be a good idea to ensure that your actions don't expand IRS inquiries beyond those specified in the audit letter.
Suspicious activity can trigger an audit, but there's no definitive reason why the IRS doesn't audit taxpayers at specific times and for specific reasons. If the taxpayer or representative disagrees with the report, they can submit additional documentation or work to clarify things in the audit report. I've seen IRS revenue agents (auditors) roll their eyes when they see complicated spending categories turn into a good even number. If a tax problem is not resolved within the time allowed by the statute of limitations, the IRS may ask the taxpayer to extend the law for an additional time.
The IRS generally has no problem with small refunds because predicting the exact amount of withholding needed throughout the year is a difficult task, especially when considering deductions. An IRS audit lawyer knows this and does everything possible to ensure that the audit is under the client's control. Taxpayers can deduct the expenses included in Article 183 only to the extent of the gross income of that particular activity during the fiscal year, so losses attributable to non-profit activities are essentially not allowed, and the IRS recently updated its guidelines for analyzing these activities. However, if it seems like you're taking deductions (or tax credits) that you're not entitled to or your deductions seem unusually high, you could have the IRS review your return.