A Step-by-Step Guide to Preparing for an IRS Audit

Receiving a tax audit notice from the IRS comes with mixed emotions, especially when it's your first time. It's normal to feel terrified because you don't know what could have prompted it. In this kind of situation, it's good to stay calm and make decisions from the point of strength. So, we've put together this guide to show you how to prepare for an IRS audit. Let's get to it!

What Is an IRS Audit?

The quick, straightforward answer is: reviewing your accounts by IRS auditors to ascertain compliance with U.S. tax laws and regulations.

The IRS can request to audit either individual or business accounts. Sometimes, this can be both depending on the prevailing circumstances. Also, the audit can be done via mail or an in-person interview at your local IRS office, your business premises, or your accountant's office.

What Triggers Tax Audits?

The first question that rings in your mind is why you're receiving the tax audit notice from the IRS. Isn't it? There's no need to panic, though! IRS can ask for tax audits because of one or more reasons, as you'll discover below.

  • Failure to report all or some of your income
  • When your business and personal deductions aren't adding up
  • You have inflated business losses
  • Reporting questionable donations
  • Unusually high income
  • Gross errors in your tax returns
  • Consistently reporting losses year after year

One or more of these reasons can raise the alarm to trigger an IRS tax audit. Nonetheless, you don't need to worry about anything if you know you're 100% compliant. Besides that, often the IRS only wants to verify where they see an anomaly.

What to Bring to an IRS Audit

The moment you receive the audit notice, you know you have a case to answer. Reacting to the situation doesn't help. Instead, you want to prepare yourself the best way possible. During the audit, the IRS will request certain business and personal information. Below is the quick rundown.

  • Receipts
  • Previous year's tax returns
  • Bills and canceled checks
  • Legal papers like divorce settlements and custody agreements
  • Loan agreements
  • Logs and diaries
  • Tickets
  • Medical records
  • Schedule K-1
  • Theft and loss records
  • Employment records

How to Prepare for an IRS Audit: Step-by-Step Guide

There are three types of IRS audits depending on the severity of the matter. They include correspondence (mail) audit, office examination audit, and field audit. Whichever type you're dealing with, the process is the same. Below are the things to do to prepare for the audits.

1. Reach Out to Professionals for Help

Reading the tax law and making meaning out of it can be a hurdle. The first thing you want to do is admit you can't do it on your own. Thus, reaching out to professionals (qualified and certified in tax matters) goes a long way.

That being said, you want to reach out to tax attorneys and Certified Public Accountants (CPAs) to represent you because they are trained to handle tax resolution and other tax-related issues.

2. Maintain Up-to-Date Records

Maintaining a good record of your personal and business information can save you from many frustrations down the road. The different types of information to keep a good record of are your expenses, receipts, and previous year's tax returns like we've already seen.

The main benefit of keeping the records up to date is to prepare for moments like this. The IRS will never send a warning in advance then serve you with a letter later. So, it may be hard putting together every piece of information with short notice.

That's why you want to be ever ready if a situation arises. Also, you want to organize your records by types, such as primary and secondary records, with the help of tax professionals. This enables you to pull out relevant information on the fly when IRS auditors ask for it.

Lastly, it goes a long way to have an up to date business and personal tax information for at least the last three years.

3. Critically Assess Your Records and Fill In Gaps

We already know the importance of maintaining up-to-date business and personal tax records. But what if you don't have any of this information ready? You only need to stay calm and figure a way out of it because, to be honest, life gets in the way for everyone.

That being said, you want to go back in time and collect all the relevant information IRS is likely to request for the particular tax period.

For specific information like medical expenses, which you may not have proof for, you can always go to your doctor or the health facility you got the services from. Please do this for all required information and organize them in a logical way for presentation.

4. Acquaint Yourself With the IRS Audit Process

At this point, you already have the information the IRS could be interested in. But how conversant are you with the audit process? As a first-timer, this can be frustrating! So, you want to prepare adequately for it. But how should you go about it?

You can use some research to understand the IRS audit process. First, start by checking online resources. You may also want to supplement this information with firsthand information from friends and relatives who've gone through the process.

5. Remain Professional

Lastly, you want to behave professionally as much as possible. Play your part by complying with IRS guidelines like the venue and time. You can always negotiate a convenient timing with the help of your representative if you can't attend the meeting on the set date.

Show up early dressed decently and respond to questions with calmness. Only respond with the required information. You want to avoid giving too much information when it's not needed because it can land you into more trouble.


Wrapping Up | IRS Audit and Tax Resolution

If you feel you can't handle your tax resolution on your own, we're always happy to help. So please get in touch with us now.