Taxes are a part of everyone’s life. What you might not know, however, is that not everyone pays their taxes in the same way. Statistically speaking, even among high-income earners and successful e-commerce or SaaS business owners, tax evasion is rampant. Depending on your income and assets, you may be subject to an audit from the IRS at some point. Luckily for you, this article will explain what a tax audit is and how to stay out of trouble with the IRS so that you’re fully tax audit proof. Keep reading to find out more!
What is tax audit?
A tax audit is a review of a person or business’s tax return conducted by an IRS auditor. The goal is to ensure that the taxpayer’s return is accurate. It is a process used by tax authorities to check if the taxpayers are paying their taxes honestly, and if they are paying their taxes with all the appropriate deductions and credits.
You could be audited for a number of reasons, but high-income earners and/or people who claim deductions are most likely to be audited. There are also some IRS tax audit red flags that may trigger an audit.
What should you expect when you’re being audited?
The process of a tax audit is generally straightforward:
- The IRS will send you a letter about the audit and set up an appointment. The letter will include a date and time for the audit that you should attend. They will ask you to bring documentation, such as financial statements, receipts, and tax forms.
- You’ll bring your records to the appointment — a representative might accompany you if you have a complicated return. You should bring a representative with experience in the area in which you are being audited, if possible
- The auditor will review the information and ask questions about any items that are unclear or that might seem unusual. The auditor’s primary goal is to find mistakes on your return.
- Once the audit is complete, the auditor will let you know if you owe more money or if you can expect a refund. If the auditor finds mistakes, they’ll ask you to correct them.
Why are you being audited?
If you’re selected for a tax audit, it means that there’s something on your previous year’s return that has piqued the interest of the IRS, or perhaps another taxing authority.
There are many reasons why you might be audited, but they generally fall into two categories:
- You made a large amount of income and/or claimed a large deduction.
- You fall outside the statistical norm for your income level.
The IRS has a certain standard for what a particular tax payer’s income and deductions are supposed to be. If you fall outside that standard, you may be audited. The fact that you made a lot of money and claimed a big deduction, also increases your chances to be audited.
Additionally, the IRS randomly audits a certain percentage of taxpayers each year — sometimes it’s a large percentage, sometimes it’s small. There’s no way to know in advance whether you’ll be the subject to an audit.
Want to find out more about taxes? Check out our article ‘How to Apply Taxes on Stripe‘.
Strategies to Stay Out of Trouble
While there are some situations where attempting to avoid being audited is justified, the vast majority of taxpayers would benefit more from being honest rather than attempting to hide something. The auditor is trained to sniff out dishonesty and will almost always find any attempt to hide assets or income, no matter how small they are.
Don’t be defensive
Being honest doesn’t mean you have to be defensive. Remember, the auditor’s job is to find any mistakes on your return. Being defensive and refusing to answer questions will only make it more likely that you raise suspicions and undergo a more scrupulous procedure which will increase the chances of finding mistakes.
Bring a representative if you need to
If you’re being audited in a specialized area — let’s say you’re a high-income earner who is being audited for unusual deductions — it may be helpful to have a representative present. Bringing a representative will show the auditor that you know what you’re doing and will help you get through the audit more quickly.
The audit isn’t just a one-way street. You’re entitled to ask questions about the process and about any auditor findings. This will help you understand the audit process more clearly and may reveal some areas where you need to back up your claims with additional documentation.
Use specialized software
With so many technologies available, you may choose to use specialized accounting software, such as Synder, to help you record your business income and expenses with no manual work involved. This way, come tax audit, you’ll have fewer things to stress about.
Final words on tax audit
If you’re ever audited, rest assured that the auditor is fully aware that you’re under a lot of stress. Auditors are trained to be patient and sympathetic, and they know that an audit is an extremely difficult and stressful situation. If you’re honest and prepared, though, the audit rarely ends badly. Rather than being a terrifying experience, an audit can be a great opportunity to understand your finances better and make sure that everything is in order. So don’t stress if you get a letter from the IRS — most audits are completed with no issues, and with little preparation. You’ll be just fine.