Dollars & Sense

Your Risk of IRS Audits

Nothing is quite as dreaded as an IRS audit. If you should find yourself on the receiving end of an IRS audit notice here’s some good advice.

First, it is our recommendation that you have an experienced tax professional handle the audit for you. Notify your tax professional as soon as possible. Your tax professional can help prepare you for an audit, accompany you to the audit or act as your representative and go instead of you.

Even if you feel you can handle the audit yourself, you may want to notify your tax professional so that he/she can review the tax return in question and the supporting documents before your first meeting or conversation with the IRS.

The self-employed have always been at greater risk of an audit than any other group. The IRS tends to audit those tax returns with the potential for the biggest payoff. Hence the self-employed are more closely scrutinized than any other group, so be prepared to substantiate your business expenses.

If you have a deduction that is unusual or higher than usual it’s a good idea to attach supporting documentation with the tax return. Providing substantiation gives the IRS proof that the deduction is legitimate. Not to mention that the IRS isn’t much interested in auditing those with backup to all their deductions.

During a business audit, no matter what the audits main focal point, the IRS auditor will most likely look at meal, entertainment and auto deduction records as well. 

Tips for handling an audit
1. During an audit you must substantiate any credits, deductions or exemptions the IRS is questioning.

2. You have the right to postpone the audit in order to get your records and information gathered. Always request more time if you need it.

3. Do not have an audit conducted in your home or place of business if possible. Go to the IRS or have your tax professional represent you.

4. Do not provide the IRS with more information than you have to.

5. Be prepared to owe something, chances are you will (statistically speaking).

6. Always consult a tax professional prior to the audit. If the audit is not going well request a recess to consult your tax professional. Any fee paid to a tax professional for audit representation is deductible.

7. If you feel the auditor is treating you unfairly ask to speak with the auditor’s manager.

8. If you don’t agree with the audit results, you may appeal.

IRS audit guides exist for more than 50 different kinds of businesses. These guides are used by IRS auditors when conducting tax examinations of particular types of businesses and professions. You can find these guides on the IRS website at www.irs.gov, click on “Businesses” and then “Market Segment Specialization Program”.

Audit selection
Most people are not aware that the IRS uses a computer program called the Discriminate Inventory Function System (DIF) which assigns a score to each tax return after they are processed. The score is based on calculations developed by the IRS to identify returns with the highest likelihood of tax change upon audit. 

The DIF score increased for various items on a return (such as a Schedule C) and decreases for other items (such as using a paid preparer). Attaching proof of unusual items on a return may reduce the chance of an audit particularly deductions that are unusually high in relation to a taxpayer’s income.

Taxpayer rights

Taxpayers have a right to the following:

*The right to be represented by an attorney, CPA or enrolled agent during an audit. The taxpayer need not be present at an audit interview unless a summons was issued to the taxpayer.

*The right to go to an audit without representation and at any time during the interview request to have the audit suspended to allow the taxpayer the right to consultation.

*The right to know why the IRS is asking for particular information and to understand the audit process.

*The right to make an audio recording of an IRS interview with advanced notice (the IRS has the same right).

*The right to be free of repetitive examination.

This article has been presented by PBS Tax & Bookkeeping Service, a company which has been providing income tax and bookkeeping services to the trucking industry for over a quarter century.  If you would like further information, please contact us at 800-697-5153.  Visit our Web Site at www.pbstax.com.

Everyone’s financial situation is different.  This article does not give and is not intended to give specific accounting and/or tax advice.  Please consult with your own tax or accounting professional.