Facing an IRS audit can be a daunting experience, evoking feelings of apprehension and uncertainty. However, the process may not be as overwhelming as it initially seems. If you’re a government contractor, you’ve likely encountered more rigorous audits from the DCAA during contract proposals. Still, it’s crucial not to navigate this situation alone. Here’s what you should know about handling an IRS audit and why having an advocate by your side can make a significant difference.


Understanding the Selection Process: Upon receiving an audit notice, you might wonder why you were chosen for scrutiny. Rather than panicking, consider that certain factors trigger red flags in the IRS’s automated system, leading to an audit. Some common reasons for selection include:

  1. Claiming a significant amount in deductions relative to your income (e.g., claiming $60,000 in deductions with only $65,000 in reported income).
  2. Using deductions that are frequently abused, such as business vehicle and home office deductions.
  3. Reporting recurring business losses for consecutive tax years.
  4. Claiming business deductions that do not align with your industry (e.g., a construction contractor deducting AV equipment).

It’s essential to remember that if you legitimately qualify for the deductions, there’s no need to avoid claiming them out of fear of an audit. The IRS audit will provide you with an opportunity to substantiate your claims accurately.


What to Expect Next: To anticipate the next steps in your IRS audit, carefully review the notice sent to you. The letter from the IRS should indicate whether you will undergo a correspondence audit or an in-person audit.

  1. Correspondence Audit: This process is straightforward and less intimidating. The IRS will request additional information or documents to support the items reported on your return. For instance, if you claimed substantial charitable deductions, they may ask for receipts of your donations. You’ll need to provide the requested documentation and await the IRS’s review, which could lead to three possible outcomes:a. The documents confirm your claims, and no changes are made to your return. b. The auditor determines you overpaid, and you’ll receive a tax refund. c. The auditor decides you underpaid and proposes a change to your tax return. In this case, you can accept the change, sign an agreement, and pay the additional amount. Alternatively, you have the option to challenge the IRS’s assessment, leading to a conference with an IRS manager for further review.

    Having a CPA by your side in this scenario is highly beneficial, both in assembling and submitting your documentation and representing you during discussions with the IRS.

  2. In-Person Audit: This type of audit is more complex and somewhat more stressful than a correspondence audit. An IRS auditor will visit your home or business to review your documents in person. They will typically request the following types of information for review:a. Financial records for all income sources, including bank statements, tax refunds, asset sales, pensions, and business records. b. Copies of tax returns from the past three years. c. Information about any past tax penalties you’ve incurred.

    To ensure a smoother audit, it’s advisable to have your CPA present. If you worked with one of our CPAs to file your tax return, you have the right to have us represent you during the IRS audit.

Navigating an IRS audit can be less stressful than anticipated, especially with professional guidance and representation. A knowledgeable advocate, such as a CPA, can help you navigate the process, ensure proper documentation submission, and provide valuable support in any challenging circumstances that may arise.