Tax Audit Representation
It may be every taxpayer’s worst nightmare: the dreaded tax audit. Being audited is serious and can have dire consequences if the outcome of the audit doesn’t go in your favor.
An audit can result in a taxpayer owing hundreds or even thousands of dollars, serving as an upsetting surprise to individuals who thought their tax obligation was fulfilled. In extreme cases, an IRS audit can result in criminal penalties and even jail time. Even in situations where the taxpayer’s audit is random (and therefore not based on wrongdoing or error), the tax audit process is complicated, time-consuming, and stressful.
At Key Tax Group, we understand the complexity, confusion, and consternation involved in a tax audit. That’s why we offer full-service tax audit representation to help you before, during, and after an audit. We specialize in tax audit representation and can represent you before the taxing authorities question you regarding your tax return or at any point during your audit.
When faced with an audit, it’s important to be informed about the process, be proactive, and ensure that you have an experienced, no-nonsense tax audit representative by your side protecting your rights and ensuring that your audit is accurate and fair.
Why Am I Being Audited?
When you begin the audit process, it’s important to understand that being audited doesn’t always mean that you did something wrong; far from owing additional fees and penalties, some audits even result in the taxpayer receiving a tax refund.
In some situations, a taxpayer may be audited to verify the accuracy of the information on their return, as part of a routine procedure to ensure compliance, or the audit may be initiated by a random computer-generated selection.
Oftentimes, however, a taxpayer is audited because of some inconsistency, error, or fraudulent action (intentional or otherwise) that is reflected on their tax return.
Whatever the reason behind your audit and regardless of whether you are being audited as an individual or a business, you’ll need to be prepared to answer questions and provide extensive documentation to support the accuracy of the information included in your return. Examples of documents that you may be required to produce include:
- Expense records and other documents that reflect expense-related activities, such as calendars, logs, or appointment books
- Financial records, including bank statements, canceled checks, receipts, or handwritten cash remittance slips
- Paper and electronic credit card statements
- Proof of paid invoices from individuals or businesses
- Proof of purchase and maintenance of equipment for business use, including cell phones, computers, printers, copiers, vehicles, and other assets
- Vehicle records and related expenses data
- Records of business rental expenses, including leases and rental insurance policy
- Entertainment and travel receipts
- Loan agreements
- Medical records and related expenses
- Documents proving loss or theft of assets, such as insurance reports, adjustor’s appraisal, or other proof
- Proof of charitable contributions
- Legal records that impact your finances, such as a divorce decree or land purchase
- Schedule K-1 reports of shareholders’ share of income, losses, credits, and deductions
- Any other records, including those in electronic form, that may support or contradict your tax return
If you are being audited, the situation can go from bad to worse quickly unless you contact an experienced tax attorney immediately. Usually, a small business will be required to produce the above-referenced records for the three previous tax years; however, the auditor will be looking for information that could lead to opening up other tax years to an audit (up to six years), wasting even more of your time and money.
What To Expect During An Audit
The IRS conducts several types of tax audits:
- Correspondence audits, which are carried out via letter
- Office audits, which take place in an IRS office
- Field audits, which may be done at your home or place of business
Once your audit begins, the auditor assigned to your case will review the information you supplied in your tax return and the supporting documentation that you have provided. While it may feel like the auditor is going through your records with a fine-toothed comb eager to penalize the smallest error, in reality, they are tasked with identifying individuals or businesses whose records reflect one or more of the following red flags:
- Disproportionate deposits in comparison to reported income
- Concealed assets, such as non-disclosed property, brokerage accounts, or bank accounts
- Excessive personal expenditures
- Business profits that were deposited into personal accounts instead of business accounts
- A questionable excess of deductions
When the audit is complete, the taxpayer will receive one of the following three outcomes:
- Agreed: Your return will be updated resulting in additional money due, including taxes, penalties, or interest. By agreeing, you accept the changes and agree to pay the new tax amount due.
- No change: The auditor concludes that the information you provided on your tax information was accurate and no further action or payment is needed.
- Disagreed: The auditor determines that your tax return needs to be updated and additional money is due, but you dispute that finding.
What To Do If You Disagree With The Outcome of Your Federal or State Tax Audit
If you disagree with the outcome of your audit, don’t panic: As long as you act in a timely manner, you have options available to dispute the findings. Remember that the Taxpayer Bill of Rights mentioned above gives you the right to seek review through formal or informal proceedings of any adverse decision. It also guarantees your right to consult with an experienced tax representative, such as the team of experienced tax representatives at Key Tax Group.
Don’t face your audit alone. Without experienced representation, you could end up owing large amounts of money to the IRS. Audits are complicated and require special knowledge to navigate successfully: most clients are unsure what to disclose, how to disclose, and how to present the supporting documentation in a way that will prevent them from being railroaded by an aggressive auditor questioning them about their purchases and lifestyle.
Full-Service Audit Representation
Unlike other companies, we don’t shy away from tax audit representation. Instead, we take the lead in your audit by reviewing your returns and pinpointing potential issues, then use that information to identify additional documentation, provide supporting arguments, and minimize the impact of any amount assessed against you. And our help doesn’t stop there: In the event that you are assessed a penalty, our tax professionals can help determine a resolution based on your financial situation.
Tax Audit Help With Key Tax Group
Don’t be defeated by an audit: With the tax professionals at Key Tax Group by your side, you can conquer your audit without wasting time and money trying to navigate complex tax code on your own. For more information on how Key Tax Group can protect your interests, contact our office today for your free initial consultation.
Frequently Asked Questions
A: The auditor will be able to review several types of documents to confirm your reported income, including:
- 1099 (for independent contractors)
- W-2 (for salaried employees)
- Information received from the IRS that includes figures for mortgage interest paid, interest income you have received, and sales of investment bonds or stocks
A: There are simple steps you can take, including:
- Ensuring that the information you provide on your tax return is accurate before submitting it to the state, including your Social Security
- Number, address, name, claims and deductions, as well as double-checking that you have signed your return
- Make sure you file your tax return by the deadline
- Include all income received, even if you only received one type of taxable income in small amounts
- Be careful when listing travel and entertainment expenses, as excessive expenses can be red flags
- Confirm the accuracy of any home office deductions that you claim and double-check that you have documentation to support your deductions
- Throughout the tax year, keep detailed records of any income, claims, or deductions you plan on taking at the end of the year
Additionally, if you are a small business owner, you may be able to learn more about tax audit guides for the particular type of business or industry you're in, such as:
- Commercial rental agencies
- Construction or real property contractors
- Convenience stores
- Grocery stores
- Hotel or transient rental manufacturers
- Motor vehicle dealerships
- Repair technicians (of tangible personal property)
- Restaurants and bars
- Retailer or wholesaler
The IRS also offers a "Guide to an IRS Audit" video on its website that helps small business owners understand the steps involved in an audit.
A: The circumstances that trigger an IRS tax audit can be as unique as the individuals or businesses being audited, but there are some general reasons that the IRS takes notice of a taxpayer, such as:
- Selecting the incorrect filing status: Make sure you and your spouse choose the same status, with both of you either claiming the standard deduction or itemized deductions.
- Math errors: This is an easy trap to fall into—and one that will easily bring you to the attention of the IRS—so make sure you triple-check every number and calculation on your return.
- Omissions: Be sure to include every bit of information that's required, whether it helps you get a refund or causes you to pay more. The risks of omitting information may outweigh any gains.
- Cash transactions: Businesses that deal in cash transactions may draw extra scrutiny, as may employees whose pay includes cash, such as restaurant servers or bartenders. Keep good records of cash that you handle, and make sure to report all of your cash income.
- Living outside of the United States: The government does not make it particularly easy for those living abroad to file their taxes promptly and accurately. This is an area in which you may want the guidance of an attorney experienced in such filings.
- Claims of dependents: As with choosing your filing status, make sure you and your spouse are in sync on dependent claims. Only one of you is allowed to claim a child.
- Reporting less than your actual income: Your employer and others who pay you supply information on your income from them to the IRS. Any differences between amounts they report and you report can raise a red flag.
A: Not necessarily. Considering how complex tax issues can be, there may be other reasons you're being contacted. According to the IRS's web page on notices and letters, these reasons may include:
- You are due a smaller or larger refund
- Your identity needs to be verified
- Additional information is needed
- The IRS has changed your return
- The IRS has questions about your return
- You have a balance due
- There are delays in processing your return
As the IRS advises, carefully read any communications you receive and make sure to respond by the specific date cited in the letter if it contains one.
A: Audits are complicated and, as mentioned above, can result in serious consequences including owing large amounts of money and even jail time. Consulting an experienced tax representative is the best way to both protect your rights and ensure that you aren’t responsible for taxes you don’t actually owe.