What Happens if you Get Audited?
Being Audited fills most citizens with more dread than if they were told they owe a tax debt to the IRS. Getting an IRS Audit is something no individual, or business owner ever wants to go through. It is time intensive, headache inducing, resource consuming, business operations halting, and overall a nightmare. But it is one of those things you cannot avoid and just have to grit your teeth and get it over with, like a family reunion on Thanksgiving.
Following are a series of Q&A to simplify what happens when a person is Audited by IRS:
Why Would You Be Selected For An Audit?
The selection process for an audit by a Tax Agency is somewhat random, but it is also targeted towards a certain group which raises certain red flags. When the tax payers are tagged with suspicious activity, the tax agency choses the unfortunate individuals for being audited at random among them. following are some more popular triggers for audit that a tax agency watches out for.
I) If there are large changes in your regular annual sales tax.
II) A significant amount of exempt sales your company has filed under 501(C) or its sub categories.
III) If your company has consistent late filings for taxes by continued violations of deadlines.
IV) If there is incorrect math involved in your calculations resulting in frequent errors.
V) If your company has a significant nexus in a jurisdiction, but you have no registration.
VI) If you file and remit sales tax, but not the use tax.
VII) Whistleblowers in a company also trigger a tax audit.
VIII) A drop in taxable sales is one of the biggest triggers for an audit.
IX) If you request multiple or a single large-scale refund.
X) Luck of the draw is also a significant reason for being audited for taxes.
How will you be notified if you have been selected?
If you are selected for an audit, you will usually be notified through mail. The letter provides all relevant contact information and instructions. A call or an email is never sent before a notification through regular mail. If you get such a mail, you must be sure to follow all the instructions to the letter. If you avoid or procrastinate, then IRS is liable to impose penalties upon you for such misconduct. The IRS Audit penalties increase with the magnitude of offense. It is better to just follow the given instructions
promptly, or contact your lawyer and accountant.
What will you be Required to Provide for an Audit?
The IRS will request from you to send them some specific documents in the IRS Audit letter. Since you are legally required to keep all the records you utilize to prepare your tax returns for at least three years from the date you file a return anyway, you can easily submit them at a moment’s notice. This is because the IRS can audit returns filed within the last three years, and you must be able to present documentation at the given time. However, they may review additional years if a substantial error is found and ask you to produce older documents. Our advice is to hold onto the records within the past eight years so you can provide anything that may be requested. The maximum time period for IRS investigation is usually six years. Following are some of the relevant documentation you may be needed to provide;
I) Chart of Accounts
II) Trial Balance
III) List of locations of your business operations
V) Review of all exempt certificates
VI) Fixed asset purchases
VII) Non asset purchases
VIII) Review of all local, state and federal returns
How is the audit conducted?
IRS reviews your records and files either by mail or through interviews which are conducted in-person. Such interviews can take place at the regional IRS office, or they can be conducted at your business location or your home by a field agent. In case of investigation being conducted by mail, you may be requested to present additional information about specific items or agendas of interest by the audit officer. In case of there being too many records, or absence of clarity on requirements, you can request for an in-person interview.
How long does the Audit take?
An audit process does not have a time limit. It typically starts the moment you receive your initial notice by IRS. There are several factors which determine what length of time will your audit take, such as;
I) The type of audit
II) The complexity of issues
III) The availability of information requested
IV) Schedule availability of both parties
V) Your agreements or disagreements with the findings
How does an Audit reach its Conclusion?
An audit is concluded in one of following three ways;
1. The IRS can conclude through its findings that no change is necessary, if you have substantiated all the items under review satisfactorily.
2. If the IRS proposes changes, and you agree, you will be asked to sign a specific form, depending on the type of audit conducted, and you will be instructed how to pay if money is owed.
3. If the IRS proposes changes, and you disagree, you can request a conference with an IRS manager, contact an appeals officer offered by the IRS for mediation, or file an appeal by submitting a formal written protest.