It’s an old saying that “there’ll never be anything that’s guaranteed except death and taxes.” While Ben Franklin (and any CPA) said you should timely file your tax returns each year, sometimes law-abiding citizens find themselves facing IRS scrutiny of their filed returns through no intentional fault of their own, potentially facing additional taxes and mounding IRS penalties.
So, what happens with IRS audits, and what are you supposed to do in response?
Before we jump into what you should do if you are on the receiving end of an IRS audit, let’s look at the tax-paying process and the most common tax missteps that can lead to the IRS knocking on your door.
Annual Tax-Paying Process
The U.S. requires citizens to report taxes, which is hopefully not a surprise to read. Once a year, a taxpayer assesses their finances and reports this information to the IRS (reported income) with requisite documents, calculates taxes, and pays it, or waits not-so-patiently for a refund of what they’ve overpaid throughout the tax year.
The proprietary software of the IRS reviews the numbers sent, and all should be solid with your compliance and standing.
This is the ideal and easy way to cover tax debt owed, and most folks will never receive any disputes or errors. However, like mentioned above, we sometimes make unintentional mistakes or are the victim of shoddy tax professionals.
Let’s take a look at the reasons why most audits happen to taxpayers and business owners and then what to do should you face an IRS audit.
Why Does the IRS Audit People?
An IRS audit is performed in an effort to minimize that notorious tax gap, the difference between what the IRS is actually owed from taxpayers and what the federal government actually receives from taxpayers. While some audits are enacted at random for quality control, compliance minimums, and to promote parity amongst all tax brackets, the IRS commonly flags for audit specific taxpayers as a result of fishy, suspicious activity.
We aren’t pro-skirting the rules, but we are adamantly against paying more than the legal minimum you owe in taxes. While we can help taxpayers cut and structure what they owe the IRS, here are some steps to avoid, unless you want to wind up in the IRS office and have to call for IRS audit defense.
Reasons the IRS Will Audit You
“Oh, no! That was a typo.”
“Oops! I miscalculated my taxable income.”
“Whoopsies! I mixed up some numbers!”
Math isn’t everyone’s best subject, but mathematical errors on your taxes are going to lead to more trouble than a failing geometry grade in high school ever did.
With the prevalence of tax software at the click of your mouse, tax preparer stations set up inside the grocery store, and the fact that you can even find a tax attorney on TikTok telling you best practices and missteps to avoid in order to keep it clean and avoid an IRS audit… well, to put it simply: there’s no excuse for math errors in your taxes, and the IRS knows it.
Of course mistakes can happen, but making sure to double check your numbers can safeguard you from the IRS thinking you’ve intentionally committed fraud. While the federal government might let a few typos fly, making a substantial error when you file tax returns can easily introduce you to an IRS auditor and an even bigger tax bill than you were trying to skirt, unintentionally or otherwise.
If math really isn’t your thing, there are plenty of affordable options for sound tax advice and preparation services that are free from tax consequences. Rely on them so you don’t end up in tax court facing a tax liability from your errors of addition!
Being Too Charitable
Listen, we’re not here to tell you not to give to worthy causes and organizations that are important to you. We are, however, here to warn you about the civil penalties and criminal penalties that can result from playing too fast and loose with the charitable contribution tax code.
If you made honest and allowable charitable contributions, by all means, you are due for some deductions when you go to pay taxes, and you should absolutely claim them! The caveat here, and it should not come as a shock: don’t file false or fraudulent donations claims, and ALWAYS keep a paper trail of receipts that substantiate the claims you’re making to avoid tax penalties and an enormous headache.
Failure to Report All Taxable Income
Want a fast pass to meet an IRS manager and charges against you for tax evasion? Simple. Skimp on your reported income.
Many folks (who are now deeply regretful) intentionally misrepresent (lie about) what they’ve earned in taxable income, and even unsuspecting folks who don’t mean to have made this mistake end up in the hot seat with IRS, too.
Be extra careful when reporting income, especially if you’re a service or freelance worker. Don’t think a lack of a W-2 means the tax man won’t come knocking on your door. Freelance workers receive 1099s, and there are many other ways you can be discovered for tax evasion in related examinations. Just be honest, even if you can’t pay your balance at the time.
Too Many Business Expenses and Losses
This is one that trips up small business owners often, and it’s usually from lack of good tax advice. Making sure you’re not claiming too many business expenses or reported losses is important.
The IRS accepts quite a bit as far as write-offs and losses in the tax code, but they will draw the line and drop the hammer if your filings are overrun with supposed business expenses or too many years of operating at a loss.
Even if you’re found to be at no fault, taking poetic license with what is classified as a business write-off is not worth the headache of an audit defense. Trust us. We’ve been there.
Best Response to IRS Audits
Filing a tax return is an important responsibility, and we’ve gone over the most common ways people end up seeking audit representation to stay compliant. While most people will be able to file their taxes and receive a tax refund, those with more complex tax situations, or are simply a bit unlucky, could face an audit from the IRS.
If you receive an audit notice that you are to be audited, there are several things you should do to make the process easier and ensure you get through it without any IRS audit penalties.
Confirm the Audit
Millions of people every year receive some form of audit notice from the IRS calling something into question. While most people may overreact and assume it requires a full-blown audit defense, there is a chance that they just need one piece of information to finalize their review.
Before doing anything, you should carefully review the letter and confirm with the IRS whether or not you’re going through a full audit.
If it turns out you are to be audited, the next thing you need to do is gather and provide as much information as possible. You will need to collect all of your tax-related forms including your W-2 statements, bank account statements, mortgage account statements, and anything else related to income or any form of tax deduction.
Having all of this organized and ready for the IRS will lead to a quicker review and determination.
Speak with a Trusted Accountant
If you hired an accountant to prepare your taxes, or if you paid for an audit support service, you should reach out to them immediately. They will help you to gather the information you need and present it in a format that the IRS is seeking. They will also be able to answer any specific questions that the IRS may have, which can take a lot of the work off your shoulders.
Be Polite and Courteous
Going through an audit with the IRS is a stressful experience. Furthermore, it can be easy to feel defensive and angry towards the IRS agent. However, it would be a big mistake to be rude or not provide all the information they are seeking.
Instead, you should focus on being polite and courteous and give as much information as promptly as possible. That will keep you on good terms with IRS during the entire process and will increase your chances of receiving a satisfactory review.
Undergoing a grueling investigation when audited by the IRS can be stressful and challenging; however, there are several things that you can do after you get your notification of the review that will reduce your risk of IRS audit penalties and make it a less stressful experience.
You should contact your qualified tax professional to see what resources are available for you during an audit and craft a defense against incurring a single IRS audit penalty.
If you need an expert tax resolution provider who knows how to navigate the IRS maze like a pro, reach out to our firm to schedule a no-obligation, confidential, free 40-minute consultation to learn what options you have to permanently resolve your tax problem. https://taxcrisisrescue.com/contact-us/