The mere thought of a tax investigation or audit is enough to strike fear into business owners and ordinary individuals who file personal tax returns. The percentage of total returns that are investigated each year is low. If it does happen to you or your business, there are ways to cope and survive the process.
Where to Begin?
Individuals without itemized deductions can file a short and easy tax return. Many do this online annually and have no issues because everything is straightforward. People with itemized deductions, like travel expenses, children, or part time businesses from home will want to have taxes prepared by an experienced firm, such as Brown Smith Wallace.
Business owners need to seek out tax services long before returns are due to plan strategies for remaining in compliance with accurate documentation. Additional services include a review of deductions that are applicable and making sure quarterly paperwork and payments are submitted on time, among others. Keep in mind, there are three major reasons to have taxes prepared by professionals:
- Complete knowledge of ever-changing tax laws
- Maximizing deductions of which taxpayer is unaware
- Representation during IRS audit or investigation
First and Foremost
Once a letter of investigation or audit arrives, the first tip is to remain calm. Take a deep breath, put the letter down and go back to it later in the day and call your tax professional. That person will guide people through the process and let them know what to expect. This initial call provides the opportunity for a review of the return.
Gathering all requested documentation and records is the second tip because these must be given to the IRS (Internal Revenue Service) on time to avoid delays. Supporting information examples include receipts, reasons for travel expenses to indicate they are work or business related and proof of deductions for dependents.
Conduct to Benefit Outcome
It is imperative to be completely honest when dealing with the IRS. Assume agents have done an internal investigation of any past records and returns, so trying to hide information is futile. Disclosing previously unreported income is wise to avoid a routine investigation from becoming a criminal one.
Along those same lines, destroying evidence is detrimental to the process because that act makes people appear guilty. This will be the case even if parties are not guilty of noncompliance, padding the books or fraud. The result is an extension of the investigation to clear up any additional questions agent have.
Some investigations and correspondence audits can be done via the postal service or Email. Information is requested to answer specific questions regarding the return. Once that information is received and satisfactory, the process is completed. It is still important to be ready for a face-to-face meeting if one is required.
The Investigation Process
Several reasons are identified as causes for IRS investigation. Some criminal activities targeted include not filing tax returns, questionable returns, public corruption and fraud of any kind. The first stage is a primary investigation internally to substantiate tips or suspicions. If information is determined to be false, the investigation stops at this point.
Information with merit that is grounded in fact results in the continuation of the investigation. This is only done after careful review of each case by agent supervisors. The process is not taken lightly by the IRS because time and resources used can be extensive.
Types of Audits
During the regular tax season when everyone is filing a return, most audits are conducted on a random basis. The purpose is to check that a percentage of returns are accurate. Tax laws change often and those who have not researched them may inadvertently under or overestimated payment. This is referred to as a correspondence audit and is considered the least stressful one.
An office audit is almost exclusively experienced by business owners and can be very stressful. Information and records need to be submitted at the local IRS office for review. A business that claimed excessive travel expenses, for example, will need to bring receipts for each trip. Supporting records are also requested, such as the documentation about the purpose of the trip in relation to the business.
A field audit is the type that is to be avoided at all costs, if possible. This entails agents arriving at your home of business location to conduct the audit on-site. A delegated space must be allocated for the duration of the process. Customers, clients, or neighbors become curious and speculate the reasons for IRS involvement.
There are 2 additional tips that apply to audits. One is to review taxpayer rights. These can be found on the IRS website and a number is provided to have any questions answered. People who know their rights while an audit is conducted expedites the process which benefits both sides.
The last tip is to appeal any decisions with which you do not agree. A new part of the overall process begins, but it is possible for the revenue service to make a mistake. Penalties, fines, any community retributions or other judgments for findings that are correct and virtually indisputable should be paid to allow the audit to close. The business or individual can then move on from the experience.
The old adage that death and taxes are the only guaranteed experiences in life holds true for both workers and business owners. Filing taxes is frustrating, especially if a payment is required rather than a refund. Most people just get it done and are never contacted by the IRS. Those who are subject to an investigation or audit will find the entire process time-consuming and stressful.
Remember to stay calm and be honest when placed in that situation. In the case of wise taxpayers, they can be relieved that taxes were prepared by an experienced professional. Guidance, someone to answer questions and representation during an investigation will be readily available. Others will begin to panic when they realize that they have to start the process alone.