Tax returns are checked automatically without the help of the IRS. But there are situations in which an additional audit is needed. For example, you are self-employed, or the business requires a considerable investment. Sometimes checks don’t mean anything, and it’s just a formality. Or the verification can be quite cumbersome. Let’s figure out what an IRS audit is, who needs to go through it, and how to prepare correctly.
What you need to know about an IRS audit
An IRS audit is not a verdict on fraud. Anyone can be tested. Even the one that filled out the declaration as correctly as possible.
During the audit, your tax return is carefully checked. You should note, the documentation is not chosen randomly. Verification is carried out if there is an error in the information. The tax office can send the declaration to audit within three years after it is completed. Remember, the decision of the inspection is not final. If you disagree, you can file an appeal against the decision.
Once the review is complete, the IRS closes the audit. If the commission does not need any violations, then the declaration does not need to be amended. Or they may suggest an adjustment to the tax document. You will receive the result within 30 days of the mail verification date.
Reasons for an IRS audit
The IRS can check any declaration. Most often, verification is carried out by those with a business. Also at risk are those who independently maintain their accounting. These are lawyers, doctors, and cosmetologists. If you earn above average salary, you may check your declaration.
Certain factors may lead to an audit. These include:
- Registration of advance payment on children’s credit. The IRS carefully checks that the amounts received were spent on children and that the recipient meets all the requirements;
- Cashing out a pension account ahead of time. The commission identifies withdrawals that have not been taxed. If proven, be prepared to pay an additional 10% fine;
- Hobby monetization. If your hobby makes you money, you will most likely need to go through an IRS check;
- Having a bank account in another country. The taxpayer may not submit information about a foreign account in the declaration or incorrectly indicate the details or level of income;
- Processing unemployment benefits. The commission needs to make sure that the person who made the payment does not have a job;
- Round numbers in the declaration. A considerable number of rounded numbers — causes mistrust. Therefore, verification is needed;
- Operations with digital assets. Bitcoin, Ethereum, and other cryptocurrencies are becoming more and more popular. There are special requirements for their inclusion in the tax return. That is what is being checked.
If you received a considerable amount, there is a high probability of an IRS audit. People who earn more than $200,000 are more likely to be checked. It is justified by the fact that more factors are needed when drawing up a declaration.
The IRS audit is often interested in those that work as independent contractors. As practice shows, it is precisely such declarations that are most often paid attention to. It includes small businesses and part-time employment.
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Types of audit
You may encounter different types of validation. Most often, the audit is carried out by mail. You just need to send the necessary documents to the commission. These may be missing bank checks or additional papers.
An office audit is another type of IRS audit. You will need to collect everything and bring it to the tax office. If the commission finds serious errors, you will also be invited to an interview to ask clarifying questions.
During an on-site inspection, a specialist comes to your office or enterprise. Thus, the accuracy of the declaration and the compliance of all essential documents are checked. The audit can be carried out in the office of a full-time or personal accountant, as well as in your representative’s office, if any.
Field and office inspections require more time and careful preparation. You will not just need to submit documents for an audit. Be prepared to answer the agent’s questions about your own activities and financial management. Fortunately, such an IRS audit is the least common. Usually, taxpayers’ documents are checked by mail.
Tips for a successful audit
Before being audited by the IRS, carefully review your rights; if you need a delay, be sure to say so. Only requested documents should be taken to verification. It is necessary to fix all the documents you submit.
Be polite during the audit. Do not be rude; casually throw papers on the table. The commission is exceptionally harmful to such behavior, fraught with negative consequences. Professionalism and courtesy will help you quickly pass the audit.
Give clear and correct answers to the representatives of the commission. You must prove that the income level indicated in the declaration is right; you do not have illegal debts or loans.
Contact a specialist to help. He will help to collect all the necessary papers and create a verification strategy. In this case, the CPA enrolled agent will represent your interests. Therefore, providing access to all the required information and documents is essential.
Remember, audit results can be challenged. You have a month to file an appeal.
What Documents Need for the Audit
For an IRS audit, you need to provide the requested documents. To easily pass the test, you need to prepare carefully. You will need to take the following:
- a copy of the tax return that is being audited
- copies of declarations over the past two years
- a copy of the declaration for the current year
- copies of all documents you sent to the tax
- results of past checks (if any)
- all notices from the IRS to the current tax year
This list of documents will allow you to prepare and collect everything you require quickly. Check the audit requirements carefully before submitting. It is important to provide a complete package of documents. Otherwise, the verification will be delayed.
How to avoid declaration validation
No one can promise that your declaration will not be audited. But still, there are a few points to reduce the likelihood of an IRS check. For this, you need the following:
- indicate in the order the exact amount of donations, income, and expenses;
- check documents carefully before sending;
- avoid math errors when filling out the form.
Also, consider the amount and, on the contrary, underestimate the income. Before sending the documents, you need to check everything carefully. It is best to do this several times. You will be sure all sums are indicated correctly, and all the necessary places are signed.
Author: Charles Lutwidge