There is no fun or good way to receive the news: you are under audit by the Internal Revenue Service. An IRS Audit can present uncertainty and anxiety in even the most calm and collected individuals. As a result, taxpayers must be ready to work with the IRS to adhere to all official tax guidelines. When a potential audit approaches, having the assistance of a professional can make all the difference in the world.
Private equity expert and investor Mark Hauser has made a career out of guiding businesses and individuals toward the appropriate support they need in the financial sector. Hauser outlined the impact of an IRS tax audit while underscoring how best to prepare in a recent article for Market Business News.
Why Am I Being Audited by the IRS?
The Internal Revenue Service defines an IRS audit as reviewing or examining an individual or organization’s accounts and financial information. The goal of the audit is to assess whether or not the information provided by the taxpayer is accurate and compliant with tax laws.
Mark Hauser notes that the point of an IRS audit is to reduce the tax gap between the taxpayer and the money owed to the agency. IRS audits can be instigated for several reasons, some of which Mark Hauser outlined below.
Risk Factors That Trigger an IRS Audit
The IRS will frequently audit tax returns if they appear to contain any suspicious or unusual activity. While these phrases may sound vague, Mark Hauser has identified seven key risk factors that will meet the bar for the definition of suspicious or potentially questionable activity.
- Excess Business Expenses – Taxpayers will receive deductions for their business or industry to alleviate their tax burden. When these deductions become overwhelming, the IRS will take a closer look.
- Home Office Deductions – Home offices are common among entrepreneurs and self-employed individuals. Home office deductions allow taxpayers to claim a part of their household as an expense. The IRS always looks closer at individuals claiming a home office deduction.
- Math Errors – Even the best tax prep professionals are still human and can make errors. Math errors and unusual rounding methods may trigger a potential audit by the IRS.
- Large Charitable Donations – Individuals who make significant charitable contributions may receive a tax deduction, but they might also garner the attention of the IRS. The IRS notices more significant donations incongruent with an individual’s income level or prior donation practices.
The Audit Approaches
Private equity investor Mark Hauser notes that the taxpayer has 30 days to respond to their initial audit letter, though he advises them to answer sooner. Taxpayers may be accompanied by an IRS Enrolled Agent, a Certified Public Accountant, or a paid tax preparer for their audit, wherein both parties will pore over the requested documentation.