THE IRS IS AUDITING YOU

The government is making a concerted effort to find unreported income and related taxes.  It believes that these “missing” tax payments are in the billions of dollars.  As a result, they are stepping up auditing and enforcement.

The first thing that you need to do is make sure it is a legitimate communication.  Scam artists also see the uptick in enforcement, and they will try to fool you.  The IRS will only notify you in writing.  Anything else should raise your suspicions.

This can be very serious.  They will examine both your revenues and expenses/deductions.  You should hire a tax expert to guide you unless you are 100% certain that there are no gray areas.  It is not just the additional taxes that you owe, it will also include interest and penalties.  And then you might be flagged for future examinations, depending on the results of the audit.  There may also be criminal charges filed.

Your first expert should be your current accountant.  Ask them about their past experiences.  If you are uncomfortable with their responses, don’t be afraid to source other experts.  Google might be a good start, but unless you can get specific and favorable references, go elsewhere.  Maybe your accountant or attorney has a good reference.  

Don’t be shy about using social media for recommendations.  Just because you are being audited does not mean that you are guilty.  For example, I am involved with a non profit group.  Our pension plan was selected for a routine audit.  It has been active since 1980, and it had never been audited.  I reached out to the IRS auditor to confirm the request, and then I contacted our CPA firm.  They managed the process; we only responded through them.  After volumes of sometimes redundant electronic records (and $2,500 in accounting fees), we passed the audit with no exceptions.

Please remember that the IRS is clamping down on 1099 arrangements.  As either the employer or sub-contractor, make sure you conform to current IRS regulations.  Those penalties for non-conformity may be severe.

Typically the audit covers up to the three previous years, most often they only select one year.  However, if fraud is suspected, they can go back further.  Standard procedure is six years, but the statute of limitations for fraud is unlimited.  Penalties for fraud are quite severe.  Make sure that you maintain your records.  As a general rule, keep your personal records for three years and for your business records, seven years.

If they uncover an “honest” mistake, you will be allowed to file an amended return and pay the additional taxes, interest and possibly penalties.

By the way, these audits can be with regard to your personal or business tax returns.  There are certain red flags that may prompt an audit, but randomly anyone can be selected.  The random pool has increased due to their overall compliance goals, and more specifically sole proprietors are being targeted.

Good luck.