Three of the scariest letters in the American vocabulary are "IRS." The Internal Revenue Service strikes fear in the hearts of many taxpayers, as the prospect of an audit is so uncomfortable that most joke they'd prefer any variety of awkward medical procedures to an audit by the IRS. If you get audited by the IRS, what should you do?
First and foremost, it's important to realize that the IRS does not (generally speaking) target individual taxpayers with audits. Although the number of taxpayer audits has increased 37% since 2006, the focus of many of those audits have been on high-income taxpayers, abusive tax shelters, and corporations with questionable approaches to taxation. Factors that influence audits include:
- Large charitable deductions
- Large business expenses (particularly in excess of known profits/revenue)
- Inaccurate W2 or 1099 reporting
- Excessive itemized deductions
- Concealment of cash receipts and transactions
- Complex business and investment transactions
Tips to Avoid an IRS Audit
When you receive a notification of audit from the IRS, your first thought is fear. In reality though, if you've been tracking your expenses and income, and maintaining accurate records throughout the year you'll be in good shape. By maintaining accurate records, you avoid red flags in the first place, and make it easier to get through an audit when it occurs. A few tips to help you track the right paperwork throughout the year:
- Keep at least three years-worth of tax returns and records
- Keep checkbook stubs from your personal account (and business, if applicable)
- Organize all of your receipts from purchases throughout the year
- Track cost basis for property and taxable investments
- File all your bills in organized folders so you can find them easily
- Write down and track your deductible items as they occur throughout the year
If You're Chosen for an Audit, Relax
Should you be targeted for an audit by the IRS, don't panic. Take a deep breath and focus on refreshing your memory first. Look back through the details of your return to see if you can identify what might look suspicious in the eyes of the IRS. Gather and organize your records to support the items questioned on your return by the IRS. Establish a range of settlement options you're comfortable accepting prior to examination so that you're prepared. Additional advice to keep in mind includes:
- Don't over-divulge: You don't need to give the IRS any extra incentive to look deeper. If you have more records that don't apply to the items in question, just keep them to yourself. Stick to the items covered in the IRS Notice of Audit.
- Offer employees guidance: For business owners, instruct your employees not to discuss the business or audit with the agent. All questions should be directed to you as the owner.
- Fully prepare: If you still feel overwhelmed, seek the assistance of a tax professional to help you prepare adequately for an audit.
You lead a busy life, and stressing over an IRS audit isn’t something you should have to worry about on top of everything else. There’s no real need to fear an IRS audit unless you know you've done something wrong on purpose. However, taking that little bit of extra time and care to keep your tax records accurate and organized will not only help you avoid an audit, but will also cover you on all fronts in the event you do get audited.
Keep your head on straight and make the efforts mentioned above to ensure you are prepared, and the process should go smoothly. Preparation is key to avoiding an audit in the first place, and a tax professional can help guide you through the process.
These are the views of Social Advisors, and not necessarily those of the named representative, Broker dealer or Investment Advisor, and should not be construed as investment advice. Neither the named representative nor the named Broker dealer or Investment Advisor gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your financial advisor for further information.
Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. Richard L Farrar is a registered representative of Lincoln Financial Advisors Corp. Securities offered through Lincoln Financial Advisors Corp., a broker/dealer (Member SIPC). Investment advisory services offered through Sagemark Consulting, a division of Lincoln Financial Advisors, a registered investment advisor. Insurance offered through Lincoln affiliates and other fine companies. CRN-1344090-110315