Taxes may be one of life’s unpleasant certainties, but there are ways to minimize or eliminate potential frustrations and unnecessary expenses. Preparation is key to filing a tax return that maximizes credits and deductions without triggering red flags for IRS audits. In this blog, an Indiana tax attorney answers some common IRS audit questions, highlights red flags, discusses how to prepare for an audit, and explains when you should seek professional assistance for tax audit defense in Indiana.
An Indiana Tax Attorney Explains How to Prepare for an Audit and More
Although sometimes the IRS selects a tax return at random for review, an IRS audit may also be triggered when a tax return contains information that is inconsistent with IRS records or when aspects of a return fall outside of normal parameters as detected by a computer screening system. Involvement in transactions with another taxpayer who is being audited can also call your return into question.
Understanding red flags for IRS audits can help individuals and businesses avoid the audit process and potential penalties. Tenacious record-keeping is beneficial when filing a return and invaluable when you need to prepare for an audit or plan your tax audit defense in Indiana or elsewhere.
Red Flags for IRS Audits
There is no way to guarantee that you will not become the subject of an IRS audit. Individuals and households are more likely to be audited if their income is more than $200,000. For corporations, those with assets in excess of $10 million have the highest risk. Small businesses, their owners, and other self-employed individuals can fall into the category of most-audited, for various reasons.
Understanding some of the triggers for IRS audits can help individuals and businesses avoid scrutiny or minimize the damages if an audit does occur. In addition to income and revenue, the following items are common red flags for IRS audits:
- Income that is not reported on your tax return;
- Claiming excessive or unusual losses;
- Claiming excessive or unusual credits or deductions;
- Questionable expenses or deductions that are disproportionate to your income;
- Operating a business that deals heavily in cash;
- Business deductions for entertainment and travel;
- Excessive allocation of expenses for vehicles or equipment;
- Deducting expenses for a home office;
- Inaccurate or incorrect reporting of investment or trading losses; and
- Certain financial activities, like early retirement withdrawals, significant cash transactions, or exchanging cryptocurrency.
This is not a full list of potential red flags for IRS audits. Hoosiers with an increased risk of having their tax return flagged for review by the IRS should consider consulting with an Indiana tax attorney or another professional to discuss tax matters and plan accordingly.
How to Prepare for an Audit—and Other IRS Audit Questions Answered
If the IRS flags your tax returns to be audited, the agency will notify you by mail. The audit process involves a review of the documentation you are able to provide to support the assertions on your tax return or returns. The review of these materials may be done in person or by mail.
You can prepare for an IRS tax audit by gathering all receipts, documents, and records that support your tax return as submitted. These materials should be copied or printed and organized by year and record type. A summary of transactions should also be included for review.
Records that may be relevant or requested in an IRS audit include receipts, checks, bills, legal documents and agreements, travel and mileage logs, medical records, insurance or employment materials, and more, depending on the specifics of your audit. An IRS audit generally can review the last three years of your tax returns and related documentation, but the number of years evaluated can be increased (usually no more than six) if substantial inaccuracies are discovered. Most IRS audits occur within two years of the filing of the return in question.
The IRS may also ask that you complete a general questionnaire or questionnaires specific to the issues that triggered the audit. If you are submitting records or other correspondence to the IRS by mail, always use a delivery service that provides delivery confirmation, such as the US Postal Service’s certified mail.
IRS examiners follow Audit Techniques Guides (ATGs) that dictate the process when conducting an audit of a specific type of business. If you own a business in one of the categories included in the guides, a review of the guide that applies to your industry will be helpful in preparing for your tax audit.
If you need additional time to prepare for an audit, you must request an extension. The timeline for completion of your audit will depend on several factors, including how simple or complex your situation and documentation are, any extensions requested, and the availability and cooperation of parties involved in the audit.
Tax Audit Defense in Indiana
The right to representation by an attorney or authorized tax professional is a basic right of taxpayers that is recognized by the IRS, as is the right to appeal the results of an audit. Depending on your situation, tax audit defense in Indiana might involve understanding how to prepare for an audit, requesting mediation or a conference with IRS management after a decision by your examiner, or filing a formal appeal.
Avoid, Prepare for, and Defend Against IRS Audits with an Indiana Tax Attorney
You do not have to wait until the IRS has made a decision in your case to seek the counsel and secure the representation of an Indiana tax attorney. The professional guidance of counsel with experience in tax law can help you avoid red flags for IRS audits before you file your taxes.
If you are under scrutiny by the IRS, your attorney can help you understand how to prepare for an audit and walk with you through the process of tax audit defense in Indiana as needed. For all of your needs related to taxes and the law, contact Indiana tax attorney Julie A. Camden at Camden & Meridew, P.C. Reach out by phone at 317-770-0000 or complete the firm’s online contact form.