Many business owners ask: How can I avoid an IRS audit? The good news is that the odds against being audited are in your favor. In fiscal year 2018, the IRS audited approximately 0.6% of individuals. Businesses, large corporations and high-income individuals are more likely to be audited, but overall, audit rates are historically low.
There’s no 100% guarantee that you won’t be picked for an audit because some tax returns are chosen randomly. However, completing your returns in a timely and accurate fashion with our firm certainly works in your favor — and it helps to know what might catch the attention of the IRS.
Audit red flags
A variety of tax-return entries may raise red flags with the IRS and may lead to an audit. Here are a few examples:
Certain types of deductions may be questioned by the IRS because there are strict recordkeeping requirements for them: for example, auto and travel expense deductions. In addition, an owner-employee salary that’s inordinately higher or lower than those in similar companies in his or her location can catch the IRS’s eye, especially if the business is structured as a corporation.
How to respond
If you’re selected for an audit, you’ll be notified by letter. Generally, the IRS won’t make initial contact by phone, but if there’s no response to the letter, the agency may follow up with a call.
Many audits simply request that you mail in documentation to support certain deductions you’ve taken. Others may ask you to take receipts and other documents to a local IRS office. Only the harshest version, the field audit, requires meeting with one or more IRS auditors. (Note: Ignore unsolicited email messages about an audit. The IRS doesn’t contact people in this manner. These are scams.)
Keep in mind that the tax agency won’t demand an immediate response to a mailed notice. You’ll be informed of the discrepancies in question and given time to prepare. You’ll need to collect and organize all relevant income and expense records. If any records are missing, you’ll have to reconstruct the information as accurately as possible based on other documentation.
If the IRS chooses you for an audit, our firm can help you:
Don’t panic if you’re contacted by the IRS. Many audits are routine. By taking a meticulous, proactive approach to how you track, document, and file your company’s tax-related information, you’ll make an audit much less painful and even decrease the chances that one will happen in the first place.
Richard Welling Insights
Filing your tax return is like submitting a resume. There is an art to it. However, when you send in your tax return, you do not want to get called for an interview. There are prudent and legal steps that you can take to minimize your exposure to government scrutiny. Feel free to contact me if you would like to discuss.