What are the chances of an IRS audit?

The chances of an IRS audit are low, but business owners should be prepared

Many business owners ask: How can I avoid an IRS audit? The good news is that the odds against being audited are in your favor. In fiscal year 2018, the IRS audited approximately 0.6% of individuals. Businesses, large corporations, and high-income individuals are more likely to be audited, but, overall, audit rates are historically low.

There’s no 100% guarantee that you won’t be picked for an audit, because some tax returns are chosen randomly. However, completing your returns in a timely and accurate fashion with Fiducial certainly works in your favor. And it helps to know what might catch the attention of the IRS, so let’s get down to that!

IRS Audit red flags

A variety of tax-return entries may raise red flags with the IRS and may lead to an IRS audit. Here are a few examples:

Significant inconsistencies between previous years’ filings and your most current filing,
Gross profit margin or expenses markedly different from those of other businesses in your industry, and
Miscalculated or unusually high deductions.

Certain types of deductions may be questioned by the IRS because there are strict recordkeeping requirements for them, for example, auto and travel expense deductions. In addition, an owner-employee salary that’s inordinately higher or lower than those in similar companies in his or her location can catch the IRS’s eye, especially if the business is structured as a corporation. Fiducial can let you know when your returns may trip an audit trigger with the IRS, and forewarned is forearmed. If your number comes up for an audit, there are some things you should know.

How to respond to an IRS audit

If you’re selected for an audit, you’ll be notified by letter. Generally, the IRS won’t make initial contact by phone. But if there’s no response to the letter, the agency may follow up with a call.

Many audits simply request that you mail in documentation to support certain deductions you’ve taken. Others may ask you to take receipts and other documents to a local IRS office. Only the harshest version, the field audit, requires meeting with one or more IRS auditors. (Note: Ignore unsolicited email messages about an IRS audit. The IRS doesn’t contact people in this manner. These are scams.)

Keep in mind that the tax agency won’t demand an immediate response to a mailed notice. You’ll be informed of the discrepancies in question and given time to prepare. You’ll need to collect and organize all relevant income and expense records. If any records are missing, you’ll have to reconstruct the information as accurately as possible based on other documentation.

If the IRS chooses you for an audit, Fiducial can help you:

Understand what the IRS is disputing (it’s not always crystal clear),
Gather the specific documents and information needed, and
Respond to the auditor’s inquiries in the most expedient and effective manner.

Don’t panic if you’re contacted by the IRS. Many audits are routine. By taking a meticulous, proactive approach to how you track, document, and file your company’s tax-related information, you’ll make an IRS audit much less painful and even decrease the chances that one will happen in the first place. Fiducial can help you with all your tax needs, from planning and prep, to filing and tracking; and everything will be handled in one convenient place. Contact us today to find out more about how Fiducial can help you and your business with your tax needs.