IRS audit rates are historically low, according to the latest data, but that’s little consolation if your return is chosen to be examined. But with proper preparation and planning, you should fare well.
In fiscal year 2019, the IRS audited approximately 0.4% of individuals. Businesses, large corporations, and high-income individual returns are more likely to be audited, but overall, all types are conducted less frequently than they were a decade ago.
There’s no guarantee that you won’t be picked for an audit, because tax returns often are chosen randomly. However, the best way to survive an IRS audit is to prepare for one in advance. On an ongoing basis, you should systematically maintain documentation — invoices, bills, canceled checks, receipts, or other proof — for all items reported on your tax returns. Keep your records in one place and be aware of what might catch the attention of the IRS.
Audit hot spots
There are certain items on tax returns that are known to the IRS to involve inaccuracies, so they may lead to an audit. Here are a few examples:
- significant inconsistencies between tax returns filed in the past and your most current tax return
- gross profit margin or expenses markedly different from those of other businesses in your industry
- miscalculated or unusually high deductions
Certain types of deductions may be questioned by the IRS because there are strict recordkeeping requirements for them — for example, auto and travel expense deductions. In addition, an owner-employee salary that’s inordinately higher or lower than those in similar companies in his or her location can catch the eye of IRS auditors, especially if the business is structured as a corporation.
Responding to a letter
If you’re selected for an audit, you’ll be notified by letter. Generally, the IRS doesn’t make initial contact by phone. However, if there’s no response to the letter, the agency may follow up with a call. (Note: Ignore unsolicited email messages about an audit. The IRS doesn’t contact people this way. These are scams.)
Many audits simply request that you mail in documentation to support certain deductions you’ve taken. Others may ask you to take receipts and other documents to a local IRS office. The most intense audit is a field audit and requires meeting with one or more IRS auditors.
Keep in mind that the IRS won’t demand an immediate response to a mailed notice. You’ll be informed of the discrepancies in question and given time to prepare. You’ll need to collect and organize all relevant income and expense records. If any records are missing, you’ll have to reconstruct the information as accurately as possible based on other documentation.
If the IRS chooses you for an audit, KraftCPAs can help you:
- understand what the IRS is disputing
- gather the specific documents and information needed
- respond to the auditor’s inquiries in the most expedient and effective manner
The IRS normally has three years within which to conduct an audit, and often an audit doesn’t begin until a year or more after you file a return. Don’t panic if you’re contacted by the IRS, because many audits are routine. By taking a meticulous, proactive approach to how you track, document, and file your company’s tax information, you’ll make an audit much less painful and potentially decrease the chances that one will happen in the first place.