Simply hearing the word “audit” can be enough to put a knot in the pit of your stomach. But the good news is, an audit from the IRS probably won’t be nearly as difficult as you think it will be. In fact, if you’re a government contractor, you’ve probably dealt with far worse audits from the DCAA with every contract proposal that’s been considered. Still, that doesn’t mean you should face it alone. Here’s what you need to know about handling an IRS audit, and why you should have an advocate on your side.

Why Were You Selected?

When you get that notice in the mail that you’re being audited, the first question you might ask yourself is, “Why?” What flagged your return? Why are you being audited? Did you do something wrong? Don’t let those questions send you into a panic. More than likely, your tax return simply triggered a few red flags in the IRS’s automated system for processing tax returns. There are a few items that, when included on your return, make you a more likely candidate for an audit. These things include:

  • Claiming a large amount in deductions relative to your income (e.g., claiming $60,000 in deductions while reporting only $65,000 in income)
  • Claiming commonly abused deductions (e.g., business vehicle and home office deductions)
  • Reporting recurring business losses for consecutive tax years
  • Claiming business deductions that don’t align with your industry (e.g., a construction contractor deducting AV equipment)

The IRS’s system is programmed to recognize these red-flag items and mark them to be reviewed by a person. When your return is marked in this way, you have a much higher chance of being audited.

Of course, if you genuinely qualify for the deductions you’re claiming, you shouldn’t avoid them simply to avoid an audit. Your IRS will simply be an opportunity to show that you’re accurately claiming these items.

What Happens Next?

To understand what will likely happen next in your IRS audit, you’ll need to take a look at the notice sent to you in the mail. Your letter from the IRS should inform you whether you’re going to be the subject of a correspondence audit or an in-person audit.

If you’re receiving a correspondence audit, then you can take a deep breath and relax—the process is incredibly simple. Your notice from the IRS should inform you of additional information or documents that they need to support what you’ve reported on your return. For example, if you have large charitable deductions, they’ll want to see the receipts of all of the donations you’ve deducted. All you have to do is send in the requested documentation, then wait. The IRS will review your information and one of three things will happen next:

  1. The documents will confirm what you’ve claimed, and nothing on your return will change.
  2. The auditor will decide you overpaid, and you’ll get a refund for your taxes.
  3. The auditor will decide you underpaid and will suggest a change on your tax return. You can choose to accept the change, sign a document stating your agreement, and pay the additional amount. Or, you can challenge the IRS’s assessment, and a conference will be scheduled with an IRS manager to further review your case.

Obviously this last circumstance is one in which it is highly beneficial to have a CPA on your side. But it also pays off to use a CPA in assembling and submitting your documentation during the audit process. We can ensure that everything is in place and submitted properly so you’re less likely to find yourself in the latter situation to begin with.

The other type of audit is an in-person audit. These are more complex and, therefore, somewhat more stressful than correspondence audits. As the title implies, an in-person audit means an auditor will come to your home or business to review your documents in person. They will typically require the following types of information for review:

  1. Financial records for any and all income, including bank statements, tax refunds, asset sales, pensions, business records, and so on.
  2. Copies of tax returns for the past three years
  3. Information about past tax penalties you’ve received

To help your audit go along more smoothly, it’s a good idea to have your CPA present. If you worked with one of our CPAs to file your tax return, then you have the right to have us represent you in an IRS audit. We’ll help you through the audit process, whether it’s in person or via correspondence. Contact us today to learn more.