What is Tax Audit
Tax audits are usually understood to refer to an investigation into the background of tax returns submitted by an individual or business to a tax agency. The idea of a tax audit normally conjures up feelings of anxiety even in persons who believe their tax documents are perfectly in order. While it is true that a tax audit may be called due to some perceived irregularity in one or more returns, it is also true that an audit may be done simply as part of a random sampling.
During the Audit
Many lawyers advise having a lawyer or certified tax professional represent you during the audit, instead of going yourself.
If you’re going to be present during the audit:
* Don’t volunteer information of any type
* Answer questions as concisely as possible
* Don’t lie
* If you sense things aren’t going well, don’t hesitate to stop the audit so that you can consult with a tax attorney or accountant before continuing
* Ask to speak with the audit agent’s supervisor if you think the agent isn’t being fair
How to Avoid a Tax Audit
Some people think of a tax audit as any type of inquiry from the IRS, and they dread receiving any mail with the IRS’s return address. Even more frightening is a letter requesting a meeting. Including all your income on your tax return, providing adequate documentation, and understanding tax law can help prevent your tax return from undergoing closer scrutiny.
But if you think you have to be caught stowing away cash in an offshore bank account to trigger an audit, you better think again. One tiny error on your tax returns can have the IRS knocking on your door. In 2007, the IRS audited approximately 1.4 million returns, a 7% increase from 2006 and the highest number on record since 1998.
The best way to avoid an audit (and to deal with one) is to keep detailed records, such as receipts and bank statements that substantiate every claim, loss and deduction in your returns.
What could trigger an audit?
The number ONE red flag in triggering a tax audit is claiming false business expenses. Monies from your expenses’ payments must be used for legitimate business-related activities. However, many people end up in tax trouble when they used these monies for personal purposes and falsely characterize them as legitimate business expenses. This can be seen as a failure to report additional income on your tax return.
How to spy on the IRS
Few people know the IRS keeps secret records about every citizen. One such record is called your Individual Master File. Knowing the content of this file can be very useful to you. It’s like spying on the IRS. For example, everything the IRS intends to do regarding one or more of your tax returns is reported in this file. When you use my techniques for accessing these files (you have this right under the Freedom of Information Act), you can predict audits, collection actions — even criminal prosecutions.
How to Stop a Federal Tax Audit?
First, you will want to decide if this is something you want to face on your own. We advise that you let your accountant or tax preparer in on the audit. In fact, it is best if you let him take care of all the direct communication with the auditor. He is in a better position to be objective about the whole thing (he isn’t numb with fear). And it is important to be objective and unemotional with the auditor. Your tax preparer knows what the auditor wants to hear and will be able to discuss any problems and answer the questions more intelligently than you could (he isn’t speechless with terror). If your tax preparer wants to make time to consider the tax implications of certain information, he can stall for time with a simple, “I’ll have to check that with my client.” Besides he is more likely to understand the jargon and what the auditor wants.
The enforcement plan for small business, while a cause for concern, also offers some new opportunities. In a move to better relate to specific needs of different tax payer groups, the IRS has created a Small Business and Self-Employed Operating Division which they plan to have operational by October, 2000. Their goal is to help entrepreneurs comply with tax laws. They have also developed Market Segment Specialization Program (MSSP) to help auditors have a better understanding of different industry issues. The MSSP focuses on developing highly trained examiners for a particular market segment. A market segment may be an industry such as construction or entertainment, a profession like attorneys or real estate agents or an issue like passive activity losses. The IRS works with industry groups and associations to address industry concerns in relation to taxation of businesses in that industry.