IRS representation audits are uncommon. The IRS notifies t

he concerned party via mail. They expect the recipient to provide a detailed reply on the same. If we look at face-to-face IRS audits, they are the rarest of all types of intimation methods.

You need to cross-check all financial statements to understand the context of the audit notice. This action will help you prepare a proper response to the questions asked by the IRS team.

Also, it is vital to note that you have the option to appeal against the IRS agent’s ruling. This gives you protection and a chance to file an appeal. This is where a tax advisor comes in handy. He will provide the necessary assistance in your audit interview preparation and subsequent appeals.

An Introduction to IRS Audits

There is a key objective of the IRS representation audits on your tax return. They want to check if the income reported matches your business earnings and if all deductions claimed conform to the legal mandates in place at a given time.

If you get an audit notice, then you can be certain that it will be after meticulous preparation on their end. They have a pre-defined set of conditions to help them verify which person or organizations will have problems with their financial reports.

An important point to note in IRS representation – they can audit your record up to three years after you have filed returns with them. When they commence an audit, they make sure to complete all proceedings within a year.

The IRS conducts three types of audits:

  • By post (correspondence audit)
  • In the IRS’s office (office or desk audit)
  • In-person, at your residence or place of business (field audit)

The IRS will request information and documents to explain your tax return’s position during an audit. It’s critical to provide the data exactly as the IRS requests. If a licensed practitioner is handling the audit, assist your tax pro with the facts, and your tax pro will work with the IRS.

Importance of a tax audit for a business

An IRS audit reviews a person’s or organization’s financial records to ensure that they are properly reporting all of their accounts by US tax laws. It orders an audit if it sees problems with the returns filed. The IRS representation may flag a tax return for different reasons. Let us take a look at some of the scenarios where an organization may receive intimation of an audit:

  • Multiple years of business losses claimed
  • Unusual levels of earnings reported
  • Taking several significant deductions

Audits of small businesses:

We see that bigger public companies have stringent mandates to follow. They need to abide by the Securities and Exchange Commission (SEC) rulings and furnish all details after appointing third-party auditors to assess their financial statements.

On the other hand, small businesses do not have this stipulation to follow. They can file returns on their own (without the need for a third-party auditor to check their accounts). A Schedule C company or sole proprietorship enjoys this advantage over public companies. But still, IRS does keep a close watch over their dealings too.

An S corporation or a partnership offers the lowest degree of IRS scrutiny.

Small businesses that file Schedule C are also scrutinized by the IRS representation more closely than those filing their business tax returns as an S corporation or partnership. Its main lookout is that small businesses aren’t concealing sales or exaggerating expenses.

Different kinds of business audits:

Depending on the severity of the audit, the IRS has different modes for auditing tax returns. IRS representation audits are divided into two categories: correspondence and field audits. The following are the distinctions between them.

1. Correspondence audits:

This type of IRS representation audit is more prevalent today. The entire operation is easier to manage than the other type, i.e., field audit. In this method, the IRS team sends a notice to the concerned person or organization when it uncovers problems in financial and tax records filed with IRS. It sends a letter to them asking for clarification on this problem.

They expect the concerned person or organization to respond with a suitable reply detailing the cause/ reason for the problem, with the help of supporting documents. If the IRS is satisfied with the replies, then the notice is deemed answered, and the case is closed.

This type of audit is easy to deal with. All you need to do is provide relevant supporting documents to explain the mismatch in reported versus computed incomes or taxes.

2. Field audits:

This is the sconed type of audit. It is not as common as a correspondence audit. Also, it is the more severe of the two. When the IRS visits you for a detailed interview on the problems with financial reports, then you can be certain that they have done their homework well and they have plenty of evidence that the error is deliberate.

The auditor will examine your financial records and ask for all supporting documents for each line of entry in the records. You need to be well-prepared and cautious when facing this kind of audit.

These types of audits are better carried out at your CPA’s office. This way, you can together furnish the necessary information the IRS may need.

Conclusion:

Following the interview, the examiner will hand you a computer-generated audit report that includes the amount of additional tax due, how your return will be altered, options for appealing the report, and a space to indicate whether you agree or disagree. By signing the report, you relinquish your right to appeal to Tax Court. An IRS representation audit may result in no changes, agreed-upon changes, or changes the taxpayer objects to, resulting in filing an appeal.

You are not required to sign the report if you are unsure if you agree with it. To review the documents further, you can ask to speak with the agent’s supervisor. After that, you can appeal the decision, seek help from the Taxpayer Advocate Service, and go to court if necessary. The IRS representation examiner will often have this information ready, including the total amount you owe. From the actual date of the original return until you pay the bill, any tax debt will raise interest at 5% per year. Daily interest is compounded.