When you prepare your tax return, you should be aware of key tax issues that might raise red flags with the Internal Revenue Service and lead to an examination of your business practices.
IRS agents do not tell you everything about their mindset, agenda or procedures if they schedule you for an audit. Just the thought of the coming meeting may cause your palms to sweat, but remember that you have rights.
Raising IRS eyebrows
There are various factors that could cause the IRS to perform an audit. For example, they may become suspicious if you have unusually large deductions or business losses that continue from year to year. If you have rental income, or if you are a sole proprietor, the IRS is aware that you can be creative about reporting income and expenses. If they believe you are too creative, they may attach a red flag to your file in their office.
Do not underreport income
To underreport income is to earn an audit. The IRS has an Automated Underreporter Program that compares the income you report on your federal tax return to information the agency gathers from third parties, such as financial institutions or an employer. If they detect a mismatch, they will levy an additional assessment, and you can probably expect an audit.
Exercising your rights
During an audit, the IRS will ask you to back up the information you have provided on your tax return. An attorney experienced with tax matters will tell you there are many ways to substantiate the items under scrutiny in addition to the usual receipts and canceled checks. The IRS examiner will permit the reconstruction of financial documents and, to a certain extent, will also allow verbal explanations. In any event, you will have the opportunity to state your case.
Fighting the outcome
If you do not like the outcome of the IRS audit, you can request that the agency's Appeals Division review your case, keeping in mind that legal guidance can be valuable to you. An examination is not necessarily perfect, and you want to be sure your rights are protected in any dealings you have with the Internal Revenue Service.