You’ve Been Selected for an Audit- How it Works and what to Expect
Nobody wants to be audited.
Who wants to dig through their paperwork for receipts, bank statements, ledgers and logs from years ago? Who wants to take time off from work to go meet with the IRS for a “one hour appointment” that will easily turn into several hours? And if they are not happy with your answers, you could have multiple appointments with the IRS! It is much more cost effective to get Audit Representation so that you can move on with your life and do what you do best- operate your business, make money, and enjoy your life without thinking about IRS Agents and unpleasant IRS office visits!
Here is an overview of the process:
1. Initial Examination Letter: This is a preliminary appointment. You will get a letter in the mail which says that your Tax Return is selected for Examination. To find out what they will be looking at, see checked boxes in the letter- it lists several categories. The most common are Schedule C (Business) and 2106 (Employee Business Expenses).
2. Initial Appointment: The IRS Agent will interview you about the nature of your business, how long you have been in business, and what accounts are linked with the business. They will ask you how you pay for expenses- cash, credit card, bank card. They will ask about Ledgers, Logs, Accounting, Recordkeeping, Receipts, Invoices, and Vouchers.
3. Sampling Process: They will then proceed to “sampling” the categories in the letter. For example, if they checked Schedule C Supplies, Utilities, and Wages, then they will want to see receipts/ledgers/statements supporting each category.
IMPORTANT: They will not ask for ALL receipts in this category, just a sample of receipts, for example, based on your ledger.
THIS IS THE TIME TO PUT YOUR BEST FOOT FORWARD. Why? Because if they are satisfied with the results of sampling as well as your answers to their questions, then THE AUDIT IS COMPLETE!
Unfortunately, for people who go in without representation, this is usually not the case. Common missteps in speaking, providing and presenting information can result in a further audit, or even worse, opening up other areas of the tax return, or other years!
4. Post Audit Examination Report: If you fail to respond, often, they will treat the audit results as if you submitted zero information, and they will disallow all expenses.
Sometimes, people get scared, postpone the appointment, or fail to respond. By failing to respond to an appointment notice, or repeatedly postponing your audit appointment, you are setting yourself up at a disadvantage.
At the initial audit appointment, If the sampling of receipts/invoices is sufficient, and the answers about business operations are satisfactory, then there is no further examination!
5. Obtaining Audit Representation: At this point, you realize you may need help. Once your Audit Specialist contacts the IRS, they will send out an Information Document Request (commonly referred to as an IDR), which will require that you provide copies of receipts, credit card statements, bank statements, invoices and vouchers for the expenses.
If you do not cooperate, they can obtain your bank records and do income reconciliation (which is hard to prove), and also disallow expenses.
You may not get the full benefit of deductions as you would if you submit the proof yourself, so it is in your best interests to cooperate!
A Blue Tax Audit Specialist can help STOP the audit from moving forward (if it is at the initial examination stage). If a Post Audit Examination Report is issued, we can STILL save you money by persuading the IRS to allow SOME or ALL of the expenses, depending on your case.
The IRS will review the information and release another Examination Report.
You can’t afford NOT to call an Audit Specialist today!