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Financial
Apr 1, 2014

IRS Audits: What You Need To Know To Reduce Your Risk

Sponsored Content provided by Randy McIntyre - Partner, McIntyre, Paradis, Wood & Co.

There is nothing good about being selected for an IRS audit. At best, it’s a time-consuming nuisance. At worst, you’ll be poorer in the end. But you can reduce your likelihood of being audited, or if you are selected, of being billed.

The IRS does three types of tax audits.

The simplest and most common is called a correspondence audit. The IRS mails you a request for further information about one or more items on your return. In most cases, the issues can be resolved by responding with the appropriate documentation.

An office audit is what it sounds like: A meeting at the local IRS audit. If you are selected for an office audit, the IRS will schedule an appointment for you to meet with an auditor at their local facility. They’ll tell you in advance which specific areas of your return will be addressed and what types of documentation you should bring in.

A field audit is the most comprehensive. An IRS agent will visit your home, your business, or your representative’s office. During that visit, the agent will review the returns at issue, request documentation for any questioned items, and ultimately issue a report. That will either recommend a change in your tax liability, or will accept your return as filed.

Correspondence audits are often triggered by what’s called “information matching.” The IRS receives W-2s, 1099s, and similar reports from businesses and financial institutions and matches the numbers to the tax returns filed by the individuals involved. If the returns don’t agree with the figures reported, the taxpayer will be asked for an explanation and/or simply mailed a bill.

The IRS also uses a computer scoring system to select taxpayers for audits. Based on past experience, the system assigns a score to each tax return. The score indicates the likelihood that the taxpayer properly understood the tax liability, or that certain income was not reported. Common red flags include:
 

• Disproportionately high charitable deductions in relation to income.

• Large deductions for travel, entertainment, and business meals.

• Unusually high ratios of business use claimed for automobiles.

• Unusually high home office deductions.

• Excessive and/or repeated business losses.

• Unreported foreign bank accounts.

• Frequent large cash purchases or deposits. These turn up in reports from outside parties.

You don’t need to forego claiming legitimate deductions just because your return may include any of these red flags. You should, however, be prepared to support your position by keeping meticulous records and retaining every relevant document. The key point is to be prepared to prove everything you claim on your tax return.

My goal is to give my clients and the public useful information, explained in plain English, about their finances and taxes. If you have a question you’d like me to answer in a future article, please let me know.

Randy McIntyre is a Certified Public Accountant and a partner in McIntyre, Paradis, Wood & Company, CPAs. He has worked in public accounting since 1977, in Wilmington since 1992. His firm is built on a history of service, technical expertise, and innovative to provide the expertise of larger firms with a personal, one-on-one approach. To learn more about McIntyre, Paradis, Wood & Company, see www.mpwcpas.com. He can be reached at [email protected] or 910-793-1181.

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