What to Do If You’re Faced with an IRS Audit (8 Tips)
Posted on July 31st, 2020
“I hoped this day wouldn’t come…but I need help with an IRS audit.”
Picture this: you own a small business. You just sent out invoices a week ago, and the checks are rolling in. As you walk to the mailbox, you have a smile on your face. You pull out the mail and see a half dozen checks…and an envelope from the IRS?
Worried, you open the envelope. Panic sets in. Yes, you’ve been selected for an audit. You don’t know who can help with an IRS audit. What should you do?
Keep calm and call Robert P. Russo CPA, PC.
Or, at the very least, start by reading these strategies for how to get help with an IRS audit. We also share tactics that you can utilize now that will make a potential future audit less time-consuming and more cost-effective. After all, Robert P. Russo CPA, PC has been representing clients in audits for over 3 decades with a success rate above 90%.
Ready? Let’s dive into the basics of how to get help with an IRS audit.
Tip #1) Know an Audit is (Usually) Not Your Fault
For the most part, audits by the IRS or even a state’s tax department are random. And in even better news, the overall amount of audits have gone down. For example, the odds of an individual taxpayer being audited this year are 1 in 220.
However, if you own a business, the odds of an audit increase. Are you self-employed and filing a Schedule C form? Are you a sole proprietor with a DBA or LLC? Unfortunately, you’re at the greatest risk of being audited through no fault of your own. And the chances of needing help with an IRS audit in the future increase with the more income you earn as a self-employed business owner. Here are the odds based on annual income:
$25,000 1 in 43
$200,000 1 in 38
$1 Million 1 in 10
$10 Million 1 in 3
Tip #2) Expect an Audit if You’ve Been Careless
Keeping money from the government is a big no-no and you should plan on needing help with an IRS audit if you take careless risks. The main way to be an audit magnet is to not report – or under-report – capital gains.
Sometimes, it’s unintentional. For example, if you are a sole proprietor and you forgot to report 1099 income, that might cue the need for help with an IRS audit. Or, at the very least, you’ll get a letter from the IRS asking for clarification. Providing a prompt response and that missing 1099 form should prevent a full-on audit. (But don’t answer even simple IRS requests – like needing a 1099 form – without getting help with an IRS audit from a CPA…see Tip #3.)
Or, perhaps you own cryptocurrency and weren’t aware of the new IRS rulings from late 2019. These rulings require you to do 3 key things, including reporting if any virtual currencies you own underwent a “hard fork.” Here at Robert P. Russo CPA, PC, we are well-versed in providing help with an IRS audit – especially one that involves cryptocurrency. If you own crypto, contact us now to help avoid an audit.
Tip #3) Never Answer an Audit Request Yourself
This is the equivalent of being falsely accused of a crime, not hiring a lawyer, and contacting the prosecutor yourself. It’s not smart and can expose you to thousands of dollars in fines. Yes, you will need professional help with an IRS audit.
The first thing you should do if you get an audit request is this: give the auditor the contact information of the CPA who will represent you in the audit.
As we mentioned, it’s not just the IRS that performs audits. States often do so (Vermont, New York, and 8 more states have the highest audit risk), as well as departments within state government. So any audit request you receive should result in a call to a CPA for help with an IRS audit, a state audit, any audit! We’ve heard of one business owner who was audited by the New York State Department of Labor. The auditor believed the business owner owed money for violating a labor rule. The business owner didn’t contact a CPA, and just paid the fees. That was an admission of guilt, and soon he contacted an accountant needing help with an IRS audit. But it was too late. The IRS imposed over $40,000 in penalties for this labor issue.
Tip #4) Be Patient
There has been a recent rise in audits performed via mail, with little face-to-face interaction between auditor and CPA. Still, an audit is typically not a quick process. It might take 2 weeks or 2 months, especially if in-person meetings are involved. If your CPA has an issue with the auditor that cannot be resolved, he or she may file a formal appeal. Yes, this draws out the audit but it also ensures that you are getting the help with an IRS audit that you deserve – and hopefully avoiding many penalties and fees in the process.
Tip #5) Save Your Records for at Least 6 Years
It’s true that the statute of limitations for an IRS audit goes back 3 years. However, if the IRS believes that you’ve performed a gross understatement of income, or overstatement of deductions, they may go back 6 years! To help with an IRS audit, keep your tax returns – and all of your receipts – for at least 6 years. This will help with an IRS audit by providing your CPA with all the proof needed to show your income or deductions are accurate.
Tip #6) Keep the 2 R’s: Receipts and Records
Here’s another essential way to help with an IRS audit in advance. Keep your receipts and accurate records for everything you do as a business owner!
No, a bank statement or credit card statement is not enough. You need actual receipts for all purchases.
One of our clients used his car for over 90% business use. He purchased a $700 navigation system at Best Buy, but didn’t keep the receipt. It’s tough for a CPA to help with an IRS audit if we can’t show proof of a purchase! The credit card statement just said “Best Buy” but not what was purchased. Maybe he bought a $700 TV? You can’t blame the IRS in this situation…
As for records, it’s not the IRS’s responsibility to disprove your claimed deductions and expenses. You have to prove that they were valid business expenses.
Another client of ours is a realtor who needed help with an IRS audit. He traveled the country showing homes. The IRS wanted proof. Our client kept immaculate records and brochures of every house he’d shown in the past few years, so we avoided any penalties. When it comes to business travel expenses, it’s also imperative that you know what’s deductible – and what’s not. This can help with an IRS audit because you won’t have to say “oops, I shouldn’t have taken that deduction” (which will cost you in penalties). Instead, you’ll only take allowable deductions.
Ultimately, the more organized and detailed records and receipts you keep, the more money you save. We do all we can as CPAs to help with an IRS audit, but our time isn’t free. If your books are a mess, we have to fix them – and that costs money. That’s on top of the 20-25% penalties imposed on deductions that can’t be proven.
Tip #7) There is a SLIGHT Bright Side to an Audit
A good CPA is going to do more than help with an IRS audit. They’re going to do all they can to reduce any penalties and increase your opportunities for deductions. Yes, that means a CPA might help you uncover deductions you hadn’t taken due to poor bookkeeping. Still, the best strategy is to be prepared for an audit in the first place and that’s where our final tip comes in…
Tip #8) Meet with An Accountant Now, for Help with an IRS Audit Tomorrow
An audit is a hassle. It costs time. It’s stressful. And it takes you away from your business and personal life. You can’t avoid an audit (as noted, they’re primarily random). But you can take control of your business today – even if you never need help with an IRS audit.
The key is this: a good CPA is going to provide you with strategies to improve your business’s profitability – while ensuring you’re following the law and practicing good accounting habits. Yes, that means your CPA is going to hold you accountable for saving receipts and taking good records.
If you’re faced with audit, contact us at Robert P. Russo CPA, PC for guidance. You’re not in this alone, we’re here to help.