The pristine organization is essential to the long-term success of any individual when it comes to keeping records regarding their finances. When the Internal Revenue Service calls for an audit of finances, they’ll want to take a closer look at the documents held by the potential taxpayer in question. These documents can go back for at least two years, though it is rare for the IRS to request information from more than six years ago.
Mark Hauser is a private equity investor from Cincinnati who has made a career by guiding his clients to success in the financial field. A CPA and personal equity expert, Mark Hauser took time out of his busy schedule to note some of the critical facets of an IRS audit.
Risk Factors Triggering an IRS Audit
An IRS audit can be a random occurrence, though this is not the most common. The Internal Revenue Service defines an IRS audit as reviewing or examining an individual or organization’s accounts to ensure the information is correctly and accurately reported to the government.
IRS audits seek to reduce the gap in obligation between a taxpayer and their taxes owed. Mark Hauser notes that there are several different risk factors involved that could lead to an audit.
The most common reason is a failure to report income. Failing to report income is a big no-no as it gives the IRS pause to flag their account. Individuals with Form 1099 income, typically freelance payments and stock dividends, must report these returns.
Excessive business expenses are another potential trigger for the IRS to audit a taxpayer. The IRS may flag the taxpayer if a business takes deductions that are not customary to their industry. Work with a trusted advisor like Mark Hauser to deduct your business expenses appropriately.
Similarly, the IRS is also interested when a business reports too many Schedule C Losses. This means the company is struggling, and the IRS needs to understand how they overcome the Schedule C losses.
Preparing For an IRS Audit With Mark Hauser
Now that we understand a few ways to trigger an IRS audit, we can better understand how to prepare for one. Mark Hauser believes that preparation is the key to success, so he advises a few ways to approach your IRS audit.
- Decide on Representation – Will you work with a Certified Public Accountant or a financial professional during your audit, or will you elect for self-representation?
- Reply to Notice – Mark Hauser suggests replying to an audit notice long before the 30-day window expires.
- Compile Documents – The IRS will likely require a particular set of documentation from the taxpayer. Comply with these documents and keep them organized and accessible.
- Appeal / Non-Appeal – Once the IRS has decided on an audit, the taxpayer can appeal or accept the changes suggested (if any) by the IRS.