Any normal person will tend to panic in the event that the IRS is set to audit their tax returns. This should not be the case, especially if one has filed correct and true tax returns. Every person who submits his/her tax returns is allocated a system number by the IRS computers.
The persons to be audited are selected on the basis of discrepancies in their tax returns, or because the IRS computer randomly picked their system number, or the organization that they represent has been picked up to test for compliancy to the IRS systems in general. Either way, the IRS representative has to inform you why you are being audited.
1What Does the IRS Need to Know?
When the IRS intends to audit a person due to discrepancies in tax returns, it is because the numerical score of your tax returns falls below the average of each deduction you have made. Thus, for each deduction that falls below average the numerical score increases and one is liable to explain why it is so. The numerical score tends to be focused on areas such as the following:
- Low profit margins
- High costs of travel and entertainment allowances
- Deductions on your tax returns that exceed the IRS targets
- Complex business expenses
- There are money tips involved in your business
- Large contributions to charities
These are just some of the areas IRS may be interested in. Others may be found at www.wwwebtax.com .
2What Needs to be Prepared for Auditing by the IRS?
There are different types of audits conducted by the IRS described below:
A correspondence audit is where you receive a letter from the IRS requesting you to prepare and supply them with copies of returned receipts or canceled checks in order for them to clarify several deductions from your returns. This method targets small and simple tax returns.
An office audit is where a mail is sent to you identifying certain item discrepancies that require you or your representative to prepare and take the required documents to the IRS offices nearby for verification. This audit targets sole proprietorship businesses with sales below $500,000.
A field audit is whereby the IRS agents call the owner(s) of a business to notify them of certain discrepancies in their returns which require the agents to conduct the audit at their place of work. This method targets partnerships and incorporations.
The Taxpayer Compliance Measurement Program audit is conducted in order to upgrade the numerical score program. It requires all returns to be substantiated via documentation and therefore all checks, invoices, bank statements and contracts for all deductions need to be prepared and submitted.
3What Needs to be Prepared for Auditing by the IRS in a Field Audit?
In the telephone conversation the agent...