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In addition to the rest of us, new technology is helping the Internal Revenue Service too. With and more electronic filing, the IRS is becoming more data proficient and examination efficient. The IRS estimates that more than 80% of the expected 250 million plus returns by 2018 will be filed electronically. Thus, with increasingly sophisticated software the IRA is better able to detect red flags and identify tax returns with potential issues. The IRS has always wanted to close the so-called estimated ‘tax gap’ of $300 billion – the difference between what taxpayers actually pay and what they allegedly should pay. While IRS audits are not that common, they have been rising somewhat over the past few years. In recent years nearly 20% of large corporations with more than $10 million in assets were audited. The more money a company generates the more likely it may be a candidate for an IRS audit. That doesn’t mean smaller companies are out of the woods. They can be audited as well. As Benjamin Franklin once remarked, “an ounce of prevention is worth a pound of cure.” The prime way to prevent an audit is to do everything possible to insure that the IRS does not audit your return. Some of the more common red flags that may lead to an audit are the self-prepared returns, the handling of certain expense items, claiming or exaggerating expenses in your particular industry, claiming too many deductions, income out of synch with Form 1099 totals, failing to include income, reporting too many losses, failing to file payroll tax returns and making payments, how independent contractors are handled, etc. If you do happen to be the subject of an IRS audit, don’t panic. There is a civilized procedure for going through an audit. It is wise to both consult and have an attorney advocate who knows this field at your side. Here are some things to keep in mind. Know the rules. There is a set of procedures that come along with an IRS audit. Make sure you familiarize yourself with them. The IRS website is a good place to start. Location. If you are an online business, the IRA audit will most likely take place at a local IRS office. If you have a business, the audit can take place at your business location. An alternative is your tax preparer’s office, which most employers would prefer. Communication. If you go it alone (not recommended) anything you say or give to an IRS representative might be used against you. It might be a wiser decision to have a formal voice deal directly with the auditor. Document Requests: Make sure all document requests from the IRS are in writing so you have adequate time to gather those documents. The Last Meeting. When the audit is finished you will receive in formation about the audit and be in a better position to respond and defend your position. Extensions: If you need more time to get additional information requested by the auditor, ask for more time. There are certain forms to file that will enable you to do this. Negotiations. If there is a legitimate deficiency in your taxes, then make a settlement offer that may resolve the case. The IRS is open to that. The IRS doesn’t want you in jail if they assert you committed an infraction. They want some form of accommodation. You can file an amended return. If the situation is more serious, you also have the further option of going to U.S. Tax Court. Metcalf Legal offers experienced business counsel and can assist you with your tax and IRS audit issues. To learn more about taxes and IRS audits, or how we can assist you in related matters, contact us today to schedule a consultation.