If you are one of the many individuals selected for an Income Tax Audit, you need to know these important facts
1. It is Nothing Personal.
Your return was randomly selected based on a mathematical formula. Schedule C (Business Expenses) and Form 2106 (Employee Business Expenses) are the most commonly audited areas, but Schedule A (Itemized Deductions) and Schedule E (Rental Property) are also increasingly common areas for audit. Often, people feel as though they are being attacked or profiled, when it really is random selection within a set of parameters. However, when faced with a difficult IRS Agent, that is where Audit Representation becomes indispensable- we won’t let anyone push you around, and agents often react differently when they find out we are representing the client.
2. Be Prepared and Respond in a Timely Manner.
You could prevent a full blown audit. At the initial appointment, the IRS tells you they will be auditing certain areas of your tax return (such as supplies, legal professional expenses, and insurance on the Schedule C, for instance), and you provide your General Ledger and a stack of proof for each category to support your General Ledger. If they find that the proof matches up to the ledger for a few “samples” they test, the IRS Agent can close the audit with no balance assessed.This is why it is so important to have Audit Representation! We can either prevent the audit from proceeding further, or make the most of what proof you do have, and move your case forward, SAVING YOU TIME AND MONEY. For more information, read our article “The Audit Process: How it Works and what to Expect.”
3. The Burden of Proof is On the Taxpayer.
Once you claim certain items on your tax return, it is your responsibility to create and maintain records to prove the expenses. You must keep personal income tax records up to three years back, and business records up to five years back. Regardless of whether your audit falls within the time period, or whether it is a special case where the audit goes further back, we can help limit your audit and the extent of your audit, which will reduce the headache for you.
4. Hang on to Car Service Slips.
For Car and Truck Expenses, the odometer reading can help you verify the miles on your mileage log, as well as help you reconstruct a mileage log from memory by “retracing your steps.” We will help you every step of the way on this- we have a format for mileage logs that IRS Agents seem to love.
5. Source Documents (General Ledgers/ Logs) are Key.
Have a consistent method for keeping records for your business. QuickBooks is one type of accounting software, but choose the one that works best for you. It helps itemize your expenses and then group them in the right category during tax time. We then support the expenses on your General Ledger/Log using receipts, invoices, cancelled checks, bank statements and credit card statements. Start with a solid building block for your business and for any potential audits- keep track of your expenses!