6 Ways to Reduce Your Chance of an IRS Audit

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Failing to abide by various tax laws can lead to a financial audit by the IRS. While the causing error may be minor, the process can be costly and time-consuming. Such procedures can also halt your business if the IRS freezes your accounts, leading to significant losses and a lower client retention rate. While it is not a guarantee, taking some precautions when running a business and filing taxes can reduce the chances of an IRS audit. Here, we discuss six of those factors to help you protect your business and avoid penalties.

1. File Taxes Within the Provided Time

Sometimes, you may not have enough money to pay all the taxes you owe the IRS. Regardless, it is essential to ensure you provide your revenue information by filing back taxes. This step indicates that you acknowledge owing money and will pay when possible. It also allows you to apply for various IRS programs to stop penalty accumulation. These may include an offer in compromise, installment payment, and currently not collectible. If you do not file past taxes before the provided deadline, you may raise suspicion with the IRS leading to a financial audit. It also affects your chances of qualifying for relief programs to help you repay what you owe in the long run.

2. Claim the Right Deductions and Exemptions

Claiming a higher deduction or an exemption you do not qualify for can cause trouble with the IRS. Protect yourself from tax bills and penalties by ensuring the exemptions you claim are correct. If you have limited knowledge about this procedure and its requirements, consult a professional. By taking this measure, you can determine what you qualify for and avoid an IRS audit. These experts will also ensure that all the details you provide when remitting taxes are correct. For instance, they will counter-check your W2 and Form 1040 to ascertain that the information provided by your employer matches yours.

3. Submit Payroll Withholdings

If you are an employer, it is essential to remit all employee tax deductions to the IRS. Besides that, ensure you submit payroll reports to indicate how much your workers earn and their total tax payable. Since processing this information manually is challenging, it is advisable to get payroll software. Such platforms can reduce the chances of making tax errors related to payroll, protecting your company from audits.

4. Provide the Right Documents

When claiming a tax refund or deduction, you should attach supporting documents to avoid fines, penalties, and audits. Some of the needed items are:
  • Form W-2 for the employed
  • Form 1099-G for the unemployed
  • Records of additional income
  • Records of expenses
Other than that, it is advisable to attach canceled cheques, receipts, and explanation letters. While these documents may not be legally necessary, they can significantly reduce the chances of an audit.

5. Confirm Your Figures

One aspect that may raise a lot of suspicion with the IRS is submitting wrong tax calculations. Prevent such mistakes by double-checking your tax forms before sending them. Moreover, consider filing your taxes electronically since it notably reduces the chances of making errors. Another way to ensure you provide the correct figures is by gathering all your financial details before starting the filing process. This way, you prevent including unconfirmed information about your income or expenses.

6. Avoid Rounding Off

While working with whole numbers when filing taxes may appear simpler, it may land you in trouble. Truncating or rounding off your figures can lead to inconsistency between your tax forms and financial documents. Reduce the chances of an IRS audit by using figures as indicated on your payslip or receipts.  This measure will increase calculation accuracy and ensure your supporting documents match the information provided to the IRS.

Contact Tax Industry Today for Professional Services

Filing your taxes without professional help can increase the chances of errors, leading to audits. At Tax Industry, we offer professional filing services to help you avoid issues with the IRS. Our experts will use your financial documents and information to calculate what you owe and ensure they submit the correct information. Reach out to us today for reliable tax preparation and tax resolution services.

How Long Can the IRS Audit?

It can be distressing to learn that the Internal Revenue Services (IRS) is auditing you or your business. According to tax law, the IRS has three years from the date of your audit notification to complete your audit. How long your IRS audit takes isn’t as simple as that, however. Learn more about how long IRS audits take in normal and special circumstances.

How Long Does a Typical IRS Audit Take?


The three years mentioned above is the statute of limitations of the audit, i.e. after you are notified, the IRS has three years to complete the audit and report its findings. During this time, they must assess and/or charge any additional taxes for the return that is under audit. Even though they have three years, it isn’t uncommon for IRS audits to close within one year. According to the IRS training manual, IRS agents are required to close audits within 26 months of opening them. Therefore, typical audits take 1-2 years from the later of the due date of the return or the date it was filed. There is an exception – if tax fraud is suspected, the statute of limitations is suspended. Should the IRS find large amounts of unreported money, they have three more years to investigate. Still, they are more likely to complete their investigations before that timeline, to adhere to their training guidelines.


Types of Audits


Depending on the circumstances under investigation, the IRS conducts three types of investigations. These are:

  • Mail audits – the IRS lets you know that your returns will be audited and ask you to send supporting documents depending on the issues. These are often completed in 3-6 months.
  • Office audits – you or your tax professional meets an IRS agent at their office, usually within one year of filing your returns. If there are no extraneous circumstances (e.g. offering incomplete information) these are completed in 3-6 months
  • Field audits – the IRS agent meets with you or your tax professional in your home or business premises. These take the longest – often one year – to complete. Field audits are reserved for complex situations, usually with small or medium-sized businesses. They can take multiple years depending on the extent of investigations.

Extension of Audit Timelines


In some cases the statute of limitations of 3 years (or 6 years in the case of suspected tax fraud) can be suspended. Various variables can lead to this, but the following are the most common reasons behind audit delays:


Multiple Adjustments


If there are more adjustments to be made on your returns, you can expect the audit period to take longer. Where there are more adjustments, the IRS agent must look over the financial records with greater detail. Sometimes, they may need to open previous returns, and this takes more time.


Small Business Audit


It takes more effort and time to audit a small business compared with auditing individuals. Tracking small business income is more difficult compared to checking out wage income from salaried people. Some small businesses don’t have proper records, so the IRS agents must check websites, client records and bank records to verify that all business income has been reported. If the business has many cash transactions, it can take time to verify the income reported versus the income earned.


Pursuing Penalties


The IRS may pursue penalties if there were a lot of adjustments to be made on your return. Pursuing penalties makes the audit process take longer, since they will have to make a case for the proposed penalties. It takes some time for the IRS to decide the penalties they wish to pursue if your returns had significant adjustments. The worst penalty is fraud, and fraud case can last years, especially if the IRS pursues criminal charges. This rarely happens, however.


IRS Audit Help


If you have a problem filing your returns, you should defer to tax professionals to ensure your returns are filed correctly. And if you have received an audit notice, our tax professionals at FinishLine Tax Solutions can help you get through the process fast and easily. Contact us today to get your IRS audit help.


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5 Reasons the IRS Will Audit You

An IRS audit reviews an individual's or business's financial accounts to check if the information is reported accurately. The IRS can conduct a field audit at your home, office, or accountant's office. Sometimes the IRS conducts surprise audits, but most of the time, The IRS selects taxpayers based on suspicious activity.

Before you start preparing for tax season, take a look at some red flags likely to land you in the audit hot seat.

1. Math Errors

Math errors include subtraction, addition, multiplication, or division error, a transcription error in the same form or another form, an inaccurate use or selection of information from tax tables, and claiming credits or deductions exceeding limits.

To steer clear of mistakes, double-check your numbers. If you have too much on your plate, get professional help or use tax preparation software to avoid errors.

2. Unreported Income

You may be tempted not to report part of your income to decrease your tax liability, but beware-the IRS is watching your every move.

The IRS receives copies of your income reporting forms (including W-2, Form 1099-INT or 1099-DIV, and Form W-2G).

The IRS also receives information about your K1 income and foreign accounts. If you fail to report any income, an IRS agent may soon show up at your door.

3. Overstating Deductions

If you report false deductions, the IRS will become suspicious. Whenever you make a large donation, get a receipt so you can substantiate your claims. Keep receipts of business expenses. If you donated an item valued at more than $500, submit Form 8283 with your tax return.

4. Claiming Home Office Deductions

A self-employed taxpayer can deduct their home office expenses from their business income only if their home office qualifies (if they use it regularly and exclusively for their business).

Many taxpayers who claim home office deductions get the rules wrong. Fraudulent taxpayers try to claim deductions for expenses that do not qualify.

The IRS comes down heavily on people who over report deductions. If you try to claim a false deduction, the IRS can charge you with tax fraud.

5. Claiming Earned Income Tax Credit

The Earned Income Tax Credit or EITC is targeted at low-income taxpayers. If your investment income exceeds $3,650, you do not qualify for the EITC. Claiming the credit will trigger a tax audit.

Can't make heads or tails of tax rules? Let FinishLine Tax Solutions help. We offer end-to-end tax and compliance solutions. We will help you identity tax-saving investment avenues and ensure tax compliance.

IRS audits Most common questions

No matter how honest and diligent you are, an IRS audit can send shivers down your spine. The reason for this fear is that most people believe that IRS audits will include a team of agents knocking at their front door and confiscating everything in their house. While this is also a possible situation in extreme cases, mostly, the audit will include agents checking your financial statements and ensuring that you haven’t been reporting incorrect information on your tax forms. So, unless you are over-reporting deductible expenses or reporting less income, you don’t need to worry about IRS audits.

Here are some of the most common questions asked about the IRS audits

I always make sure that my tax forms are filed without any errors? Why would the IRS still audit me?

The process of selecting a taxpayer for an IRS audit does not mean you have made an error. Many returns are randomly selected through an automated process when the 1099s and W-2s don’t match. In some cases, they are a result of an amending oversight. However, there are some red flags for the IRS. For example, large business expenses or charitable donations can raise eyebrows. 

Is the IRS audit affected by the amount I earn?

Yes, but only if you are earning is in millions. For example, if you earn more than $200,000 annually, there is a 1% probability that you will face an IRS audit. However, this probability increases when you earn more than $1 million.

Will I be notified of an IRS audit beforehand?

Yes, the IRS will send you a notice of the audit via mail.

What are the different types of IRS audits?

There are three types of IRS audits

The first one is the correspondence audit. In this audit, you will have to back up the claims made on the returns by sending additional documents. This can include mileage logs for travel, canceled checks for charities, and receipts. 

The second type of IRS audits is the in-person audit for which you will be summoned to the office of the federal agency. 

Lastly, there is a field audit. This form of the audit will be your worst nightmare. IRS agents will be visiting you at home or office and check all the tax-related documents. 

What happens when I ignore the notice of the audit?

Ignoring the notice of the IRS audit won’t make the IRS go away. Instead, the IRS will begin to think that you are hiding something. It can force the IRS to investigate immediately and impose fines or penalties. They can even get a court order to force you to cooperate. So, after you have received the notice, it is best that you respond within 30 days. 

Can the IRS only audit my last filed tax return?

No, the IRS has 3 years for pursuing an audit. So, just because the year has passed, it doesn’t mean that you are off the hook. It is possible that you receive a notice for the 2018 returns in 2020. This is why it is recommended that you keep all the tax-related documents for 3 years.

What documents do I need to provide during the IRS audit?

You only need to submit the documents requested by the IRS. If you bring anything unnecessary, it might broaden the audit’s scope. If the IRS has asked for some unaccounted paperwork, try tracing your steps. In cases of charitable donations and medical expenses, you can easily get duplicate copies.

Do I need to have tax experts present during the IRS audit?

Having tax attorneys is not mandatory during an audit. However, having a tax attorney by your side can make the whole process a lot easier for you. Hire an attorney through tax resolution services, and he will do the rest. 

After you’ve hired tax experts, you should let them do the talking. If you volunteer extra information, it can open up another investigation and compromise your advantage. 

What will be the duration of IRS audits?

The duration of IRS audits can vary. However, tax experts recommend that you set aside a complete day to deal with the audit. 

The duration of the audit will depend on a number of factors, like how organized your financial records are or how complex the issues are. In case the IRS wants more time or wants to have a follow-up meeting, you will be notified. If you want an audio recording of the proceedings, you have to give a 10-day notice to the IRS.

What penalties might I be liable to pay after the audit?

If the IRS decided that you have underpaid taxes, you might face either one of the following penalties:

  • If the IRS finds an underpayment because of undervaluation or overvaluation of the property, understating tax liability, neglecting, or disregarding rules and regulations of the IRS, you will be facing a 20% penalty.
  • For cases of serious underpayments that are related to fraud, you might face a penalty of 75%. If this is the case, it will be your responsibility to prove otherwise.
  • For all the violations made because of negligence, fraud, and not filing returns on time or valuing the property incorrectly, you might face interest payments. It will start from the due date of the return.
  • In severe cases of tax evasions, you might even face prison. 

Can the outcome of IRS audits be appealed?

If the IRS has imposed a penalty on you and you are not satisfied with the audit report, it is possible to appeal to this outcome. You will have to send an appeal letter to the IRS within 30 days after the audit proceedings ended. If the IRS denies your appeal, you can file a petition in the tax court for bills worth $50,000 or less. For the amount more than that, you will have to knock on the door or a regular court. 

For cases of IRS audits it is best that you hire tax experts from tax resolution services. An attorney will help you put a strong foot forward. There are a number of tax resolution services in the US that can help you with your tax-related issues. IRS audit can be a complicated process with extreme outcomes. However, as long as you abide by the law, you won’t have to worry about anything.