What is an audit?
An audit is an inspection of an
individual's or entity's books and
records by the IRS. If you're being
audited, the IRS will send you a letter
stating which type of audit applies to
you.
There are 3 types of audits: a correspondence audit,
a field audit or an office audit.
Correspondence Audit: You don't need to
see an IRS agent for this type of audit.
The IRS will request documentation, and
you will be able to mail it to them
instead of delivering it in yourself.
Field Audit: If the IRS needs to verify
information about your home or business,
they may come to see it. Field audits
usually involve physical IRS
Inspections, and generally would have to
do with a business.
Office Audit: You must visit an
IRS agent in their office and provide documentation
based on what was requested.
You are
responsible to keep all supporting tax documentation
for 7 years in case of an audit.
Returns claiming the Earned Income
Credit are more likely to be audited by
the IRS.
Preparing for an Audit
Always be sure to provide everything the IRS asks for
within the requested amount of time. If
you're asked to appear before the IRS,
you should bring along your tax return
and all of the supporting documentation
for the tax year being audited, along with
any other documentation or items
requested in your IRS letter. Never let the auditor
keep any of your originals documents, always
provide them with copies of everything
requested.
According to the IRS annual data book,
individual returns where taxpayers
claimed the Earned Income Credit were
high on the list to be audited, business owners
filing a Schedule C are also
increasingly being audited.
If the corrections in your IRS audit
effects your state income tax return,
you'll need to amend that return.
California, for example, provides that
the statute of limitations on the state
return is waived if you have a Federal
adjustment, unless you report that
adjustment within 6 months of when it
becomes final.
The IRS does not generally notify the
State, unless there is a case involving
fraud. The audit offices operate
independently. Payments are made to each
office, independent of the other. The
same thing goes for refunds.
There are several ways to reduce the
chances that your tax return will come
under state tax audit. Those who work
from home should remember that the
Internal Revenue Service (IRS) tends to
focus on home office deductions. People
who qualify for home office deductions
operate their offices as principal
places of business that are in regular
and exclusive use for business. In other
words, a home office should be the place
where you spend most of your time making
the majority of your income.
To avoid a state tax audit,
Keep deductions at a reasonable level.
Retain receipts for all deductible
expenses, including food, entertainment,
travel, and auto costs. The IRS puts
deductibles under high scrutiny.
Income should be consistent with the
average income of others living in a
particular locality.
The IRS also becomes interested when
someone’s income is much lower than the
previous year’s taxable income. This
would indicate that the person is hiding
money and may result in a state tax
audit.
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