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IRS Audit
The phrase ‘IRS Audit’ is enough to send shivers down the spine of even the most diligent accountant. It’s an examination of your tax records by the Internal Revenue Service, but not an interrogation. The IRS agent is simply trying to establish that you’ve:
- Correctly reported your income, expenses, profits or losses
- Complied with the US tax court laws
- Calculated your finances in accordance with the bank’s records
IRS audit triggers
Rumors often swirl around the end of the tax year about the financial behaviors that could trigger an IRS audit letter. In truth, the IRS only lists two reasons why you might be audited:
- Random selection: your taxpayer bill is chosen through computer algorithms
- Related transactions: if one of your business partners has been selected for a tax audit, and you’ve got transactions to or from them, you’re more likely to be audited too
However, there are some other telling signs that might increase your chances of being audited by a tax professional. These include the likes of math errors, a failure to report by the deadline, and unusual patterns. Things like overstated deductions, missing income (that doesn’t match banking records) or a pattern of losses are all thought to increase the risk of being audited.
What happens if you’ve been selected for an IRS tax audit?
If selected as either an organization or individual, you’ll be notified directly by email. Then, the IRS will ask you to provide additional information to substantiate all of your financial claims and income tax calculations. This can include:
- Receipts
- Bills
- Tickets
- Credit cards information
- Theft and loss documents
- Vehicle credits
- Student loans or other loan agreements
- Medical records
- Employment documents
- Schedule K-1s
IRS audits lead to one of three actions. No change means that you’ve successfully substantiated all claims. Agreed means that the IRS has proposed a change to your tax return, and you’ve agreed. Finally, disagreed means that you understand the IRS notice, but don’t accept them and want to use your appeal rights.