How an IRS Audit Works- Understanding the Process and Prevention Techniques

Learn what to expect during an IRS audit and how to prepare for one. This article by the experts at Better Accounting Solutions provides helpful tips to avoid the stress and frustration of an IRS audit. Learn what to expect during an IRS audit and how to prepare for one.

Picture this: you're sitting at home, enjoying a nice cup of coffee, when suddenly the mail arrives. You sort through the stack of envelopes, bills, and junk mail when you come across a letter from the IRS. Your heart starts to race as you open the letter, only to find that you've been selected for an IRS audit. Panic sets in as you wonder what you've done wrong and how much trouble you might be in. 

If you've ever received this notice from the IRS, you know how nerve-wracking it can be. The thought of being audited can send shivers down anyone's spine. But the truth is, with the right information and preparation, an IRS audit doesn't have to be a nightmare. In fact, it can even be a somewhat interesting and enlightening experience.

As a responsible citizen, you may have heard about an IRS audit at least once. The Internal Revenue Service (IRS) will examine your tax return during an audit to make sure that the income and deductions you've declared are accurate. Although audits are not common, they can be time-consuming and frustrating.  The fundamentals of an IRS audit will be explained in this article, along with advice on how to avoid it.

What is an IRS Audit?

First things first, let's talk about what an IRS audit actually is. Simply put, an audit is a review of your tax return to make sure that everything is accurate and that you've paid the correct amount of taxes. It's a way for the IRS to ensure that taxpayers are in compliance with the tax laws and regulations.

The IRS has the authority to audit any taxpayer, individual or business, regardless of their income or tax bracket. It can be stressful to consider that you might be subject to an IRS audit, but it's important to keep in mind that this doesn't necessarily mean you've done anything illegal.  In fact, many audits are conducted simply to verify information on your tax return.

Types of IRS Audits

There are three main types of IRS audits: correspondence audits, office audits, and field audits:

Correspondence Audit

A correspondence audit is the most common type of IRS audit and is conducted entirely by mail. The IRS may request that you send in additional documentation or clarify certain information on your tax return. These audits are usually less severe and less complicated than other types of audits.

Office Audit

An office audit is conducted at an IRS office and is more serious than a correspondence audit. You'll be required to meet with an IRS auditor and provide documentation to support the items on your tax return. Office audits typically involve more complex issues and higher amounts of tax due.

Field Audit

A field audit is the most serious type of IRS audit and is conducted at your home, place of business, or your accountant's office. Field audits are usually reserved for more complex tax issues and larger amounts of tax due.

Why Am I Being Audited?

The IRS selects tax returns for audit using a variety of methods. They may use a computer program that identifies returns with suspicious activity, or they may choose to audit a taxpayer randomly. If the IRS suspects that you have underreported your income or claimed improper deductions, they may select your return for an audit.

Preparing for an Audit

The first thing to do if you receive a notification of an audit is to keep your composure and gather your records. You will receive a list from the IRS of the documents they will need to examine, including bank statements, receipts, and other financial data. To prevent extending the audit process, it's important to present the IRS with accurate and complete information. You can get copies of specific records from banks or other financial institutions if you can't find them otherwise.

It's important to cooperate with the IRS agent assigned to your case during the audit. Be polite and responsive, and provide only the information they request. Refrain from providing more information as this can invite more investigation.

If the audit reveals discrepancies in your tax return, the IRS will inform you of the adjustments they plan to make. You have the right to dispute any proposed changes, and you can do so by providing additional documentation or filing an appeal.

How to Avoid an IRS Audit

While being audited by the IRS can be a nerve-wracking experience, here are 3 steps you can take to reduce your chances of being audited:

Keep Accurate Records

One of the best ways to avoid an IRS audit is to keep accurate and detailed records of your income, expenses, and deductions. This can help you avoid errors and discrepancies on your tax return that could trigger an audit.

File Your Taxes on Time

Filing your taxes on time can help you avoid an audit. Late or incomplete tax returns can raise red flags and increase your chances of being audited.

Related: Don't Miss a Deadline: Everything You Need to Know About 2023 Tax Filing and Extensions

Don't Be Too Aggressive with Deductions

While it's important to take advantage of all the deductions and credits you're entitled to, being too aggressive with your deductions can raise red flags with the IRS. Make sure you have proper documentation to support your deductions and avoid claiming deductions that you're not entitled to.

Related: Top 15 Tax Deductions and Write-Offs for Self-Employed 1099 Entrepreneurs

Double Check Your Math

Math errors can be a common cause of audits. Make sure you double-check your math and use software or a tax professional to help you avoid errors. Seeking the guidance of a tax expert such as  Better Accounting Solutions can also be a smart move. A professional accountant can help you navigate the complexities of the tax code, ensure that you're taking advantage of all available deductions, and help you avoid common pitfalls that could trigger an audit. 

By working with an expert, you'll have peace of mind knowing that your taxes are being handled correctly and efficiently.

Although going through an IRS audit can be stressful, it's important to keep in mind that it does not always mean you did something wrong. You can minimize the anxiety and inconvenience of an audit by being aware of the auditing procedure and taking precautions to lessen your chance of being audited. You can help ensure that your tax return is accurate and avoid the headache of an audit. And if you do get the dreaded letter from the IRS, the team at Better Accounting Solutions is always here to help.

Related: Take Control of Your IRS Tax Debt: 5 Ways to Settle Your Tax Obligations

We’re so happy you found this article informative! Head back to our blog page to learn more tips, tricks, and guidance on accounting to maximize your business’s growth and development. 


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