Most people don’t like to hear the word audit, especially if it follows tax. However, you still may find yourself facing one, even if you’ve done your best to follow the rules. The IRS likes to make sure that you properly reported all of your earnings and are entitled to what you claimed on your returns.
If you have kept proper record keeping, these tips will help make your tax audit a little less unnerving.
Handle a Tax Audit Like a Champ
First of all, keep in mind the IRS can audit individuals just like they can a business. Taxpayers have the right to expect the tax system to consider facts and circumstances that might affect their underlying liabilities, ability to pay, or ability to provide information timely. As a taxpayer, you also have the right to receive assistance from the Taxpayer Advocate Service if you are experiencing financial difficulty or if the IRS has not resolved tax issues properly and timely through its normal channels.
According to debt.org the audit process is known as an examination and does not imply that you have intentionally made an error. In fact, the IRS contacts individuals for a variety of reasons.
Taxpayers are chosen through a “random selection and computer screening” process, according to the IRS, that is based on a statistical formula. The IRS compares tax returns against “norms” for similar returns. If your return doesn’t follow the “norms” you may be chosen for an audit.
If your tax filing includes transactions with other taxpayers, such as business partners or investors, and they were audited, you also may be audited.
Common Documents You’ll Need for an Audit
Now set aside some time and gather the following information. Taxaudit.com states that for certain business deductions, the IRS requires records to be contemporaneous with the transactions and will often disallow expenses that are based on incomplete and re-created records. In addition, there must be suitable evidence to prove that the expenses were “ordinary and necessary but not lavish” in your business field. Proof of payment is not enough – each expense must have a valid business purpose that you can prove.
There are specific requirements for substantiating deductions for travel, meals, and entertainment. As a business owner or employee, you are required to maintain an account book, diary, log, trip sheet or similar records, as well as documentary evidence, such as receipts and canceled checks, to substantiate the amount, time, place, persons met with and the business purpose of your expenditures.
Specific types of records may be needed for an audit of your business, including those that verify assets, gross receipts, purchases, and expenses. All records should be timely and indicate what was received, from whom and for what business reason.
Credit card or electronic banking statements alone may not be accepted if you are audited. The IRS requires receipts for the expenses you claim, as this is often the only way to prove what specific item or service was purchased for business purposes.
The length of time to retain books or records varies. The IRS recommends that records be retained for “as long as they may be needed for the administration of any provision of the Internal Revenue Code.” This generally means until the statute runs out, or as long as the return can be audited, which is generally three years for federal audits in most but not all cases. The statute of limitations varies by state.
Certain documents should be retained longer, if not permanently. These include copies of old tax returns, divorce decrees, adoption papers, retirement plan documents and basis records for real estate, stock, assets, and depreciable property.
Other documents individuals may be asked to bring can include:
- Home mortgage statements
- Previous tax returns
- Brokerage statements
- Retirement account records
- Pay stubs
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