Receiving an IRS audit notice can be stressful, especially when you’re unsure why your tax return was selected or what to do next. Whether you’re an individual taxpayer or a small business owner, understanding what triggers an IRS audit and knowing how to respond can make the process easier to manage.
The good news is that being selected for an audit does not automatically mean you made a mistake. With organized records and guidance from an experienced CPA, you can better understand the process and respond to the IRS with confidence.
WHAT CAN TRIGGER AN IRS AUDIT?
The IRS uses several methods to select tax returns for examination, including computerized screening, random selection, and information received from third parties. Some common situations that may lead to additional scrutiny include:
1. INCOME THAT DOESN’T MATCH IRS RECORDS
The IRS receives copies of income documents such as Forms W-2 and 1099 from employers, banks, clients, and other organizations. If the income reported on your tax return does not match those records, the IRS may request additional information.
2. UNUSUAL OR UNSUPPORTED BUSINESS EXPENSES
Business owners can deduct eligible expenses, but deductions should be ordinary, necessary, and properly documented under applicable tax rules. Large or unusual expenses, excessive deductions compared with reported income, or missing receipts may raise questions during an examination.
3. SIGNIFICANT CHANGES IN INCOME OR DEDUCTIONS
A substantial change in reported income, business losses, charitable contributions, or itemized deductions may lead the IRS to review certain items more closely. These differences do not automatically trigger an audit, but they may require supporting documentation if your return is examined.
4. ERRORS INVOLVING TAX CREDITS AND DEDUCTIONS
Incorrectly claimed tax credits, duplicate deductions, or expenses that do not meet IRS requirements can create issues. Keeping accurate records and reviewing eligibility before filing can help reduce reporting mistakes.
5. BUSINESS OR INVESTMENT CONNECTIONS
The IRS may examine a return because it involves transactions or tax issues connected to another taxpayer, such as a business partner or investor whose return is already under examination.
Remember: There is no single formula that predicts an IRS audit. Even accurately prepared tax returns can be selected for examination.
WHAT SHOULD YOU DO IF THE IRS SELECTS YOUR TAX RETURN?
If you receive an IRS audit notice, don’t ignore it or rush to send documents without understanding what the IRS is requesting.
Consider these steps:
- Read the notice carefully: Identify the tax year, items being reviewed, requested documents, and response deadline.
- Organize your records: Gather bank statements, receipts, invoices, payroll reports, tax forms, and other supporting documentation.
- Review your tax return: Compare the information reported with your financial records to identify possible discrepancies.
- Respond by the deadline: Follow the instructions in the IRS notice and keep copies of everything you submit.
- Consider professional representation: An experienced CPA can help you understand the examination and communicate with the IRS when properly authorized.
The IRS generally initiates an audit by mail, not by an unexpected phone call demanding immediate payment. If you’re unsure whether a notice is legitimate, verify it through official IRS channels.
HOW AN EXPERIENCED CPA CAN HELP YOU THROUGH AN IRS AUDIT
An IRS audit involves more than sending paperwork. You may need to explain financial transactions, support deductions, answer technical tax questions, and evaluate proposed adjustments.
Working with an experienced CPA like Daniel Huereca CPA can help you approach these responsibilities with a clearer understanding of your financial records and tax position.
With more than 20 years of experience in finance, accounting, and business management, Daniel Huereca provides guidance to individuals and business owners who need help navigating tax matters.
Through IRS audit representation, he can help with:
- Reviewing IRS notices: Understanding what the IRS is examining and what information is required.
- Organizing financial documentation: Identifying relevant records and reviewing supporting evidence.
- Communicating with the IRS: Handling authorized communications and responses within the scope of representation.
- Evaluating proposed adjustments: Reviewing potential changes to income, deductions, credits, or tax liability.
- Explaining your options: Helping you understand possible next steps if you agree or disagree with the audit findings.
A CPA with the appropriate authorization can represent eligible taxpayers before the IRS. The scope of representation depends on the professional’s credentials, authorization, and the nature of the tax matter.
DON’T FACE AN IRS AUDIT WITHOUT UNDERSTANDING YOUR OPTIONS
An IRS audit does not have to leave you guessing about what comes next. Having professional guidance can help you stay organized, understand your responsibilities, and make informed decisions throughout the examination.
If you received an IRS audit notice or need help responding to an examination, Daniel Huereca CPA can help you understand the process and explore your representation options.
Learn more about Daniel Huereca CPA’s IRS Audit Representation service and how he can help you navigate an IRS audit.
Daniel Huereca CPA, PLLC
Serving businesses and individuals throughout the Dallas-Fort Worth area.
Visit danielhuerecacpa.com or call (972) 835-6405 to discuss your tax concerns.