Recently I was asked to write an article as a guest columnist for Southwest Florida Business Today. The focus of the article is on surviving a tax audit. Below is a copy of the article as published in their June 2012 edition. Your comments are welcome.
One word can make taxpayers cringe…“audit.” Fortunately, chances are slim that you’ll experience an audit, as the IRS audited only about 1% of tax returns in 2010. However, certain triggers can boost the likelihood of an audit.
Your return may be selected because the IRS received information from a third party—for example, your bank—that differs from the information you reported on your return.
In addition, the IRS scores all returns through its Discriminant Inventory Function (DIF) System. While the formula for determining a DIF score is a well-guarded IRS secret, it’s generally understood that certain things are more likely to increase the likelihood of an audit, such as a traditionally cash-oriented businesses, tax shelters or unusually high meals and entertainment expenses.
Finally, some returns are chosen as part of the IRS’s National Research Program to help it improve its audit selection techniques.
The audit process
Should your return be chosen for an audit, implementing a few steps can smooth the process.
Nearly three-quarters of audits are correspondence audits and are completed via mail. For example, the IRS may ask for documentation on your income or the purchase or sale of real estate.
In-person audits can take place at an IRS office, your home or place of business, or at the offices of your CPA, attorney or tax preparer.
If you receive an audit notice, read it carefully. Most will indicate the items to be examined and state a response deadline. A timely response conveys that you’re organized, and thus less likely to overlook important details. It also indicates that you didn’t need excess time to fabricate a story.
Before responding to the notice, however, confer with your CPA or tax professional for help in preparing your response. If the exam will take place in person, he or she can accompany you—or even appear in your place with authorization.
If you’re going to meet in person, ask what documents the auditor is expecting, and what questions will be discussed. Of course, you’ll want to prepare this information and bring copies (not originals) of requested documents. You generally don’t want to bring more to an audit than what’s been requested, as it may prompt more questions. If an auditor asks about something that you didn’t prepare for, simply say that you’ll follow up.
Similarly, answer questions honestly, but don’t volunteer extraneous information that might lead to more inquiries. Talking about a recent, lavish vacation, for example, could suggest that your income is higher than it actually may be. Respond with, “Yes” or “No,” providing brief explanations where necessary.
Finally, always be polite. While you don’t need to become friends with the auditor, a cordial exchange can benefit the process.
Ease the process
While I hope you never hear the dreaded word “audit,” remember you can reduce your stress and anxiety by being organized, timely and professional. Bringing in your CPA can help minimize the long run cost and smooth the process.
© 2012 Michele M. Hoover, CPA. Alexander & Hoover, P.A., Certified Public Accountants, specializes in providing a wide range of diversified accounting, tax, finance, and consulting services to individuals and businesses.
To learn more, contact Michele M. Hoover, CPA at 239.481.4114 or visit http://www.alexanderhoover.com