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Here’s How an IRS Audit Works – And How to Prevent It

Accounting, Bookkeeping

What is an audit?

An audit for companies usually means a financial statement audit and it is the most common type of audit. A financial audit is an objective review and evaluation of an organization’s financial statements to ensure that they are a fair and accurate portrayal of the transactions they purport to reflect. The audit might be performed internally by organization workers or externally by a Certified Public Accountant (CPA) company.

The word “audit” may make you sweat instantly, but knowing what it is and how the Internal Revenue Service (IRS) operates may help you feel a little more at ease. Some audits are minor inconveniences, while others are burdensome. When the IRS audits your company, they conduct a thorough examination of your financial records. This includes reviewing your financial statements and ensuring that they correspond with your bookkeeping.

They usually want to make sure you aren’t underreporting your income or overreporting your deductible expenses. In either situation, you are declaring a lower tax liability than you actually have.

You’ll have a clearer picture of the situation once you’re involved in the aforementioned situation. So, wipe your brow, and let’s get started.

What happens when you get audited?

There are 3 possible outcomes of an audit:

  1. They find out you don’t owe them any money and leave you alone; a hugely popular one.
  2. The IRS finds out you owe them money. So, they make you sign an official document, confirming the amount you owe and so you pay them the due amount.
  3. The IRS finds out you are liable to pay them additional tax, and you disagree with it. In this case, you’ll want the support and expertise of an expert like a bookkeeper, accountant or a CPA.

Peak Reliance has got your back with their exceptionally trained and experienced accounting professionals to cater to all your tax needs.

Depending on your argument, the IRS will either reduce the amount you owe, make you pay the full amount, or throw out the charges altogether.

What triggers an audit?

It’s impossible to predict an audit. But they’re prompted for one of these three reasons:

  1. Random choice through the IRS system,
  2. Computer screening of returns that fall outside the IRS norms,
  3. Related examination in case your tax return is connected to another taxpayer who is being audited, you may be audited because of your connection.
The different ways you can be audited

There are 3 ways in which IRS can do this:

  1. Correspondence audit: The IRS will request further information through email or regular mail. Typically, this is due to an income omission or some major miscalculation. You must either pay the amount specified in the communication, contest it with a lawyer, and/or submit the relevant documentation, such as receipts for deductions or missing W2 forms.
  2. Office audit: The IRS may choose to have an in-person interview with you. You will need to visit the IRS office. It’s a good idea to have a CPA or a lawyer with you. You may wind up paying more in taxes or penalties or not have to pay anything at all if you contest it.
  3. Line-by-line audit: This was selected at random. The IRS examines each line of your tax return in order to create the “norms” that will trigger future audits.
How to prevent an audit?

There is no guaranteed method of avoiding an audit. However, if you do the following, you may significantly lower your chances of being subjected to one.

  • Account for all of your income
    The IRS compares the income and deductions you record on your return with the information provided by others, such as employers, banks, and companies, using the information on Forms W2, 1098, and 1099. Any disparities in reported income numbers that result in underpayment of taxes are a clear red flag for the IRS. It will very certainly prompt additional inquiry.

    So, if you have a side hustle, such as consulting or freelance work, make sure to record it, even if you think you can get away with it
  • Double check your return
    Making a thoughtless mistake on your tax return is one of the simplest ways to ensure a visit from the tax man. The IRS is required to examine your case if there is any omission, miscalculation, or error on your return. Hire a bookkeeper to ensure your records are accurate and tax-ready. Peak Reliance not only prepares your books, but can also submit your taxes for you via a tax filing provider.
  • Stay consistent with your accounting method
    As a business owner, you have the option of using either cash basis or accrual accounting. If you switch back and forth between the two approaches, the IRS may suspect you’re attempting to confuse them. That is when you will be audited.

    Whatever accounting approach you use for your company, be sure it is consistent.
  • Keep it straight—employee or contractor
    When you recruit help, you must correctly designate them as employees or independent contractors. The distinction dictates which taxes must be paid, when they must be paid, and who is responsible for them.

    Employees are often compelled to withhold income taxes and pay unemployment, social security, and Medicare taxes. You do not have to withhold or pay taxes on an independent contractor’s paycheck.
How to make an audit easier

There’s always room for help in elaborated processes and for a task like an audit, help is an integral part of the journey to a successful one. Calling in an accountant for help is the best shot for you. Peak Reliance is a reliable team of professionally seasoned accountants and tax experts that can help you get out of an audit if the need arises. Our accountants can also aid you with their experience so that an audit can be avoided at all costs, but if one does come up, we will make sure to keep you prepared. Check out our pricing plans or call us at +1 (718) 218-5558 for more information. 

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IRS, IRS Audit

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