Common IRS Audit Triggers

Several factors can trigger an IRS audit. Random selection is one possibility, while paper audits occur when reported information doesn't match IRS records. The IRS also conducts targeted audits based on income levels and tax return discrepancies. For unfiled returns, the IRS may initiate a 6020B audit or assign an individual auditor. Red flags include rounded-off numbers in income or expenses. Additionally, the IRS now employs AI to identify commonly overstated expenses, particularly in categories like entertainment, food, clothing, and vehicle expenses.

Types of Audits and Their Severity

Paper audits are generally the least severe, typically addressing only one or two issues without an assigned auditor. When an actual auditor is assigned, they may examine multiple items and potentially expand the investigation to other tax years. Revenue officers handling existing tax liabilities may also initiate audits if they notice irregularities.

Preparation and Documentation

Proper preparation for an IRS audit involves gathering comprehensive documentation. This includes bank statements for income verification and both bills/invoices and payment records for expenses. For business audits, required documents typically include general ledgers, profit and loss statements, balance sheets, trial balances, depreciation schedules, and mileage logs.

Common Mistakes and Professional Representation

Major mistakes during audits include ignoring notices, failing to provide requested information, and misunderstanding tax return components. Working with a tax professional, particularly one familiar with local field auditors and managers, can significantly improve the audit process and outcome.

The Role of Tax Attorneys

Tax attorneys provide crucial attorney-client privilege protection and can help maintain audits as civil matters rather than criminal cases. They work to achieve favorable resolutions by explaining taxpayer positions and providing compelling justification for tax return decisions.

Financial Implications

Audit outcomes may include various penalties (accuracy-related, negligence, or fraud), daily accruing interest from when the tax liability was originally owed, and potential criminal charges in severe cases.

Best Practices

The most effective approach to an IRS audit is proactive preparation. This includes organizing all relevant documents and engaging a tax attorney early in the process. The attorney can then work with the auditor to understand the scope of the audit and provide sufficient information to bring the examination to a timely conclusion while preventing expansion to additional tax years or items.