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Anatomy of a Tax Audit

If you are a business owner, navigating United States tax law can be a formidable task. The collection of rules and regulations which make up the US tax code is almost 4 million words long. In 2011, approximately 1.11% of tax returns were audited. The IRS often recovers billions of dollars in total via audits of large corporations. In general, audits by the IRS are intended to ensure adherence to tax laws and to make sure the reported amount of tax is correct.

Why Would The IRS Conduct An Audit?

There are a variety of reasons why the IRS decides to move forward with an audit. You could be subject to an audit if you, for example, hold an overseas bank account, forget to file a form, or simply have a discrepancy with your numbers.

The IRS also keeps close tabs on your deductions and the amount of money you donate for charitable purposes. An audit might be triggered if they have further questions into your reporting.

However, an audit does not mean there is a problem. An experienced tax controversy lawyer will be able to use his or her knowledge to help you through the process if you are selected for an audit.

What Happens During An Audit?

1. Selection: The IRS uses a variety of ways to determine the returns that are selected for auditing. Sometimes, authorities select returns that include some sort of financial transaction with another person who has also been selected for audit. The IRS also has statistical formulas that are used to randomly select returns.

2. Notification: If an auditor does select your review for audit after an examination process, the IRS will send a notification through the mail. The notification usually asks for additional documentation into income, expenses and deductions.

You might be able to have your audit done in-person at your home, office or an IRS office if you have too much documentation to provide. In general, small business or home businesses will have an IRS agent visit in person for an audit. Around 78% of audits in 2010 were done via mail, and the remaining 22% were in-person.

3.  Your Response: The IRS provides a list of what might be expected of you to provide in an audit and the best way to organize everything. Sometimes you may be able to respond electronically with tax software. An auditor or tax lawyer will be able to tell you if this is an option for your situation.

The amount of time an audit can take usually varies greatly due to different circumstances.

4.  Conclusion: The IRS has several ways of payment if you do end up owing more money. They will have you sign paperwork if you do agree with any of their findings.

If you disagree with their decision, you may be able to go through mediation or speak with an IRS manager.

If you are facing a tax audit, know that you have options. Contact us today to see what your next steps are.

Posted in: Tax Audit

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