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Audits by the IRS or State Tax Authorities are not to be taken lightly. That being said they are nothing to panic about either. You should not talk to the IRS with out a trained tax rep with you, and even then it is better to let the tax pro handle it. The auditors are very thorough, well trained, and very good at their jobs. Their jobs are mainly to collect as much money for the government as possible and to punish those that interfere with that process. What seems like a benign question can have very serious implications which are designed to trap you. Do not fall for the trap, hire Reliant Tax & Business Solutions to represent you or your business.
Types of Audits
Correspondence Audit -
A letter from the IRS or State shows up in your mailbox. The letter requests documentation to prove claims made on the submitted tax return. If not responded to in a timely manner, those items in question will be disregarded and removed fom the return. Not responding can also cause the situation to escalate.
The taxpayers presence is requested to show up at the designated tax office tomeet with the Auditor assigned to the case. The taxpayer has the right to have representation accompany them to the audit or go in their place. This is the time to negotiate a resolution before any further escalation.
The most serious of situations will have Revenue Agents and Revenue Officers visit a taxpayers location. Many times a field audit occurs in order to collect evidence to bused against the taxpayer. For example the IRS may show up to a store to ask the store owner for them to print the tape from their register or POS system.
Reasons for Audits
There are many myths about how audits are triggered. The following can clear up any confusion.
Many audits, particularly correspondence audits are triggered randomly. The IRS has set random audits at a historically low rate,though it doesn't mean it won't happen to you. For Individuals making below $100,000 audit rates are set to randomly select about 3 tax returns out of every 1000 filed. That is good news for 997 people out of 1000 but not for the 3 chosen. As income climbs, and more types of income reported,the rates climb as high as 2 out of 100.
Income Matching -
When a person receives a 1099 or w-2, the IRS has received the same. The IRS will often be sent income forms not sent to the taxpayer. Income matching simply means the computer system matching the income payers claim they have given to the income receivers claim they were given. If there is a mismatch, an audit is automatically triggered.
Audit Score -
Each tax return is scored on the basis of how likely it is to contain inaccurate information. Though the exact methods are not publicly known, the score is based largely on how close a tax return matches the average tax return of like kind. For example, if the average tax return filed by a taxpayer making $50,000 in income claims $1000 in charitable donations and someone with $50,000 in income claims $15,000 in donations, the audit score would be through the roof.
Related Audit -
Sometimes an examination of a taxpayer is opened because their name comes up in the course of a separate audit. If a taxpayer under audit has claimed a large deduction for a payment made to you, the IRS is likely to investigate the claim further. It may begin as just asking for help in the current audit or it can lead to the opening of another.
Project Audit -
Similar to the related audit but this related audit is of the the tax preparer that filed your tax return. Every tax return filled out or filed by the tax preparer is scrutinized. Project audits are particularly unpleasant for all involved. It is rare for a tax prepaprer no matter the skill, has a 100% compliance rate. The longer the preparer has been in business and the more clients they file, the more likely there are mistakes made somewhere which will come up in a project audit.
Whistle-blower Audit -
This audit is triggered by a tip given to the authorities with a claim of tax fraud. Thos that snitch on peoples tax issues are exceptionally loathsome individuals.
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