Lessons Learned During an IRS Audit
December 2, 2010
Recently I made the visit to the downtown office of the IRS to assist a taxpayer through a very extensive audit. The process of dealing with the IRS can cause stress and sleepless nights for the taxpayer. The reason the IRS causes such fear is that they can be a real bully. My client can attest that the auditor will ask pointed questions and make you feel frazzled and on edge. IRS auditors are trained to find errors in your tax return and they will dig hard to find things that they determine to be non-deductible. Statistically less than 2% of taxpayers are subjected to a full IRS audit but it is still worth the effort to be prepared for the worst case.
Here are some tips for you should you ever receive the dreaded letter:
Don’t try to handle the audit yourself. You may feel that you are saving some money by trying to handle the audit yourself, but you could get hit with a much higher tax deficiency (in other words you will owe much more to the IRS) than if you had the assistance of a professional who knows the tax laws.
Keep good records. The auditor will disallow your deductions if you don’t have good substantiation. Keep cancelled checks, invoices, bank statements, receipts for meals and travel documenting business purpose, mileage logs, etc. In this case, the IRS is not going paperless anytime soon! Their systems are so antiquated that you can’t even send documents by email. You will need paper proof. Or you will need the ability to drag your computer with you to the audit.
Keep check copies or use your debit/credit card. The IRS will want to see that your payments cleared the bank and the best way to show that is with a cancelled check, bank statement or credit card statement. The advantage to using your debit card or auto payment through your bank account is that your bank statement will show the payee right on the statement. If you use a lot of checks you will need copies of those checks. Most banks don’t send check copies any more. You might want to check with your bank to see how best to store that information. Most banks can send “copies” of the checks 10 to a page with your statement. That is a good option.
Keep written contracts with those that you pay, especially your independent contractors. You will need to prove that your relationship has a “business purpose” and that you pay for a service or product.
Stay away from audit “red flags” if possible. Make sure your expenses are in line with your income. Large travel and entertainment expenses are a favorite trigger for audits. Auto expenses and auto depreciation can also be a trigger. Be sure to document on your credit card statement the “business purpose” of your meals and travel expenses.
As the saying goes, if you are prepared you have no need to fear. Simple practices now will save you a lot of headache if you ever become part of that 2% audited group. You might sleep better too!
January 11, 2011 at 3:02am | Permalink
Practice shows that IRS – the unique organization where at check of your annual tax declaration the innocence presumption doesn’t work. If you don’t agree with decision IRS have the right of the appeal, using tax courts.
February 9, 2011 at 2:08pm | Permalink
I have been reading this blog on a randomly for more than a a week. Please keep up the writing.
February 24, 2011 at 2:45pm | Permalink
I am still traumatized by our audit—you were such a calm force in the storm! I highly recommend giving this task to a professional—Shauna! I’m an acupuncturist dammit not an accountant!
February 25, 2011 at 4:09am | Permalink
I always ask my friend to calculate my taxes!! I never even touch them. Dont do anything in where you know nothing!!
March 7, 2011 at 5:49am | Permalink
Are you sure my last comment was erased ?
Damn !!! I wrot PAGES !!! too bad, am tired to write more, but again am much appreciative of your work
May 24, 2011 at 1:21am | Permalink
I guess it has to due with the psychological scariness of the audit concept. But I dislike examinations just as much. If you do any audit-related research, be sure to include “examination” as a keyword.
May 27, 2011 at 8:12pm | Permalink
The very thought of being audited by the IRS sends chills down our spines. Mary McClung, a professional organizer and my friend and colleague, was recently the lucky winner of an audit.
June 12, 2011 at 1:38am | Permalink
Really it is nice post, The post is clearly highlighting the values of law.
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July 14, 2011 at 7:45am | Permalink
Thank you for the information about the IRS
July 19, 2011 at 9:38pm | Permalink
Thanks for nice allocation IRS Audit! I presume that IRS auditors are taught to find errors in your tax return.
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August 8, 2011 at 1:15am | Permalink
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August 9, 2011 at 11:04pm | Permalink
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August 13, 2011 at 11:55am | Permalink
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August 22, 2011 at 11:17pm | Permalink
I just found out that I will be going through a IRS Audit. I had all of my paperwork got destroyed due to a leaky roof.
August 24, 2011 at 1:06am | Permalink
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September 4, 2011 at 9:46am | Permalink
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