While a tax audit conducted by the Internal Revenue Service (IRS) may be a cause for concern, it shouldn’t be when you have the right documentation for your declared income and expenses. You can also keep the following discussion of the IRS audit cycle in mind so as to prevent a panic mode.
Be Aware of Possible Triggers
Based on the experience of tax accountants at Liberty Tax Service, the following are the common triggers of a tax audit:
- Losses from one year to the next, even when it’s just for a two-year tax period
- Large, even unusual, deductions with a questionable nature (i.e., the expenses are irrelevant to the business)
- Income earned via self-employment and rental income since these can be under-reported
Keep in mind, too that the IRS uses an Automated Underreporter Program, which matches the income earned as reported on the federal income tax return with the information acquired from third party sources (e.g., financial institutions and employers). When your income tax return has a mismatch, you may receive a notice of additional tax assessment from the IRS.
Know Your Rights
Even when you receive a notice for a tax audit, you should not panic. You will have, after all, an opportunity to state your case and, thus, get the matter over with, perhaps even enjoy a lower tax liability.
While the IRS typically wants to deal directly with the taxpayer instead of his representative, you are still well-advised to hire an experienced tax consultant. You may not have the intensive knowledge about the ins and outs of the complicated taxation system, which means reduced chances of making the IRS agree with your position. You will also have an experienced tax professional who will fight for your rights as a taxpayer.
Make a Deal
In a civil audit, the examiner’s main objectives will be to close the investigation in a prompt manner and make the taxpayer agree with the official IRS position; the latter is known as an agreed report. You will then have an opportunity to negotiate disputed items in your favor so that the examiner can have his agreed report and, in the process, kill two birds with one stone – make upper management view him favorably and get his work done on time.
For this reason, you should adopt a conciliatory approach coupled with your willingness to cooperate. You will be surprised at how relatively painless the tax audit was in your case, contrary to what you have been told about it.