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How to Prepare For a Tax Audit and Red flags You Should Avoid

The tax filing deadline has come and gone as households throughout the U.S. wait for tax refunds. Unfortunately, some taxpayers will come under scrutiny from the IRS, scrutiny that for most is routine. However, for a small cross-section of taxpayers, an IRS tax audit represents the beginning of a long process of detailed financial scrutiny.  

An IRS tax audit can be emotionally stressful and could even land someone in jail. But it doesn’t need to be all bad news. Those who owe back taxes will be given reasonable time to pay back taxes, provided the audit’s findings don’t give the IRS cause to bring charges. Given the IRS’s backlog and worker shortage, now would be good to get your taxes in order. And if you’re unlucky enough to have been chosen for a tax audit, the following advice will help you prepare.

What is a Tax Audit?

A tax audit is a formal and legal look at the information presented to the IRS as facts found in tax returns. Tax audits apply to everyone and all businesses. The laws that govern the IRS are directly embedded in U.S. law, making the tax audit process a crucial part of the income tax payment and refund structure. Consequently, this ability to pay income taxes and receive refunds for overpayment helps the government ensure things like fraud prevention. 

A tax audit is a necessary part of the legal system because it gives taxpayers a way to hold the government accountable. For example, the tax audit could find the IRS owes the taxpayer a refund. Indeed, the same holds for those that owe taxes. With such scrutiny, everything on a tax return must be factual and have ways of authenticating these facts.

IRS tax audits differ according to the situation. The result is the breakdown of IRS tax audits into four types that address taxpayers’ needs. These include:

  • Random Audit–this is the most common IRS tax audit. Each year IRS workers select personal tax returns at random to complete a thorough investigation of the information on the return.
  • Correspondence Audit–this type of audit is the least intrusive. The IRS notices an error and sends a request to verify the information. 
  • Field Audit–When the IRS conducts a field audit, agents go to the business or residence to get the required information physically. This is rare and reserved for severe tax-evaders.
  • Office Audit–The IRS sometimes calls taxpayers into their offices to verify tax information for the audit’s purpose. In these cases, it is a good idea to consult with a lawyer so you don’t make any statement that can be used against you.

These four audit types break down the legality behind an IRS tax audit. Needing a lawyer and coping with an IRS warrant for information from your home and office can be traumatic. 

If your tax situation gets as bad as needing a lawyer, it would be wise to call a certified CPA for financial advice. If you’re faced with one of these very serious IRS tax audits, call PB Scala, Certified CPA for valuable financial and tax information and accounting actions. As a Certified CPA, PB Scala has decades of experience.

What Happens During a Tax Audit

First, as noted above, the type of tax audit governs what happens during a tax audit. However, in most audit types the IRS begins by sending a notification through the U.S. Postal Service to the auditee informing them of the audit and why the IRS started the audit process.

Caution: The IRS typically doesn’t call your home or cell phone for official business like tax audits unless you owe a substantial sum of money. These calls are criminals looking for vital information like Social Security numbers.

Second, in most cases, you’ll have time to investigate the laws that govern your file and what can be done to help the tax audit process run smoothly. This is the time to gather all your information and prepare. If you need more time you can apply for a 30-day extension. Unfortunately, if you’ve already received the deficiency notice, you won’t qualify for the extension.

Finally, after you follow the instructions given by the IRS, there are three potential outcomes. If the IRS accepts your information with no further action, the tax audit is over. Conversely, the IRS might give you a set of things you must do to bring your taxpayer file up to date. The third option is your right to disagree with the IRS and agree to a conference with IRS managers. The IRS has more detailed information about a taxpayer’s rights.

Tax Audit Red Flags

The most common red flag for the IRS is unreported income. The IRS gets copies of 1099s and W-2s. If a return doesn’t match their records, you’ll probably receive a notice from the system with a bill. This isn’t technically an audit, but it could be if other things come up such as excessive luxury-type items like yachts and sports cars.

Itemizing for large charitable deductions will likely cause a stir because it is unusual to give large sums or high-value items unless there is substantial income to support it as represented on the tax returns and IRS records. People that don’t file taxes year after year also raise red flags at the IRS, especially if they have proof these tax evaders make $100,000 or more.

Closing Thoughts

Tax audits don’t need to be stressful. Calling Peter B. Scala, CPA, will help you put the worry to bed. He’ll work hard to get you the best tax records possible. And for future tax returns, consider hiring Peter Scala as a proactive check against tax audits. As a certified accountant, Peter Scala knows what to look for in tax returns that lead to tax audits.

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