IRS tax audit is intimidating, especially because in most cases, you’re usually unaware of the reason. Being self-employed, it is pretty normal to be audited by the IRS. However, if you do not have the receipts to substantiate the claimed deductions or expenses, the situation can become worse. It is indeed natural to feel anxious in case you are unable to locate the required receipts. But at times as stressful as these, it is important to remain calm.

But, How do I know if I’m being audited? The IRS is going to send you a notice or letter which briefly informs of the audit and provides instructions on how to go ahead with it.

Very frankly, it is often common to lose or somehow misplace receipts over the period of time, particularly if you’re a small business owner, self-employed, or are an individual with a number of transactions throughout the year. So, it is immediately concerning that an IRS tax audit comes with the very burden of proof on you to clear all claimed deductions or expenses.

But, what can you do if you have a hard time finding receipts, or you just came to know that you didn’t own it in the first place? Read ahead and find out your solution now!

What to do if you don’t have receipts?

Are you experiencing a tax audit with missing receipts? It is indeed true that the IRS allows self-employed taxpayers to validate expenses via other means.

The IRS is only going to require evidence of the claimed business deductions that occurred during the audit process. So, have you lost your receipts? Recreate a history of your business expenses which took place during that time. While preparing your income tax returns, if you’re unable to access your receipts, then it is typically advisable to not claim expense deductions on the basis of a “wild guess.”

But, How do you know if the IRS audits you ? The IRS will primarily take initiative to notify taxpayers through written correspondence or by phone, making it necessary to respond promptly and take appropriate actions.

In cases as dire as these, replying to verifiable records is the best approach to ensure you are in compliance with the rules and regulations presented by the IRS.

How does the IRS choose who to audit?

Receiving an audit from IRS is definitely intimidating, requiring careful attention and proper documentation.The IRS can choose who to audit based on a combination of factors the IRS uses in order to determine the tax returns to analyze. Even though the exact criteria and the procedure the IRS follows is really not disclosed, there are a couple factors which may potentially trigger an audit. Some of them include:

  • High-Income Earners

Individuals with higher incomes, especially those who are in the top brackets, are likely to be called in for an IRS Tax audit more than those who are not. This is particularly because higher income levels generally encompass more sophisticated tax situations, with a larger potential for errors or omissions.

  • Unreported Income

You can be called for an IRS Tax audit if your tax returns have any discrepancies or inconsistencies in the reported income, including but not limited to unreported income resulting from investments, or similar sources, causing an unusual hike in red flags and increasing the likelihood of an audit!

  • Deduction Claims

An unusually large deduction claim, especially in contrast to the reported income, can potentially trigger an audit as well. This can potentially include deductions for charitable contributions, business expenses, or several other forms of deductions which rather appear disproportionate to the reported income. Cases like these often bring the IRS home!

  • Previous Audit History

Those who have been previously audited in the past, along with several adjustments made to their returns are more likely to be audited in the future. At least they are in the radar of being called in for an audit.

  • Audits which are Industry-Specific

The IRS has always keeps a close eye on specific industries or professions which have historically somehow been associated with larger on-compliance or tax evasion. It consists of several cash-based businesses and those with a very complicated income structure.

Plus, it is vital to remember that an IRS Tax audit can be random too. It is part of the ongoing efforts to ensure that there is absolute tax compliance, deterring any and every threat of tax evasion. Truly enough, just being selected for an IRS Tax audit does not necessarily mean that you are in trouble!

There are, however, certain red flags the IRS scrutinizes for specific self-employed returns.

  • If there are failures to report income on Form 1099s by the businesses which made you payments.
  • In case there is a suspiciously high deduction rate, including but not limited to claiming every cost related to your home or personal vehicle or quite intense charitable contributions.
  • If there is misclassification of employees or a failure in issuing information Returns such as in Forms W-2 and 1099.
  • If there is a very high income rate of an individual. A taxpayer is more likely to be audited if the taxable income is typically over $1 million annually.

Taxpayers typically dodge a number of questions, including how often does the IRS audit? and how does IRS decide who to audit?”. And frankly, it depends. The IRS employs quite a few factors, like income levels, deductions, and potential discrepancies, to come up with the names of those to audit. And not just that, the very frequency of IRS tax audits depends on the risk profile of the taxpayer. But, these are often very rare, with less than even 1% of individuals being annually audited.

The IRS often also conducts random audits to ensure whether all taxpayers are working in compliance with the tax regulations. So, if you are anyhow selected for an IRS Tax audit , make sure to respond to it promptly, provide any documentation asked, and help them quite easily navigate through the processes!

What happens during an audit?

Movies often portray IRS audit notices as a line of dramatic showdowns, with a number of tension-filled scenes occuring between the agent and the taxpayer. But, frankly, if the IRS is not even closely alleging any fraudulent activity, then the audit is based on a low-key reason where the agent is more likely to ask for additional documentation to support your tax bill or refund.

But, how long can IRS audit taxes? The question has created quite the fuss.

The very span of time the IRS is going to take to audit taxes largely depends on several factors, such as the audit type, the complexity of the tax return, and the statute of limitations. This, quite usually, stretches the time to as much as 3 years from the date of filing, or the due date of return, whichever later.

There are largely three major types of Audits that the IRS conducts, including:

It is usually conducted through email, where the IRS typically requests for additional information on specific items that have been reported on the tax return.  This is where you might need to provide supporting documentation or write to the IRS in order to answer their questions.

  • Office Audit

For an Office audit, taxpayers are usually needed to physically pay a visit to a local IRS office in order to be examined in-person about your tax return. The IRS, here, might as well ask for additional documentation, conduct an interview, or go through certain items on your tax return during the visit.

  • Field Audit

A Field audit is often detailed and more comprehensive, taking place at your home, business or the office of the tax professional. IRS agents often conduct an in-person examination, review any and every bit of your financial records and ask questions regarding your tax returns.

There is another form of audit the IRS often conducts, named Taxpayer Compliance Measurement Program (TCMP) Audit, where there is a deep examination of all items present on your tax return. It is typically conducted on a random basis to accumulate data for the IRS compliance measurement purposes. Questions like “ how do you know if you are being audited? ” have tossed taxpayers upside down. But, simply, note that you will receive an official notice, including but not limited to a letter or notification, plainly outlining all information of the audit procedure.

These are really protracted and incredibly time-consuming, involving an elaborate review of your tax return, along with all supporting documents. It is true that an audit from IRS can be very frightening. But at times, it is necessary to remain tactful and positive to get the best outcome.

Conclusion

Have you received an IRS tax audit notice, and you’ve just discovered that the receipts aren’t on you right now? The first step is calming down. In a situation as harrowing as this can lead to piles of issues coming your way, but if handled properly, it can turn down in severity. If you don’t have the receipts on you, then start understanding the IRS audit process first, provide every available documentation as necessary and be fully transparent to them.

At this point, it is very important to seek a helping hand from a tax professional to smoothly navigate through the audit procedure and have layers of guidance. Let not questions like how often does the IRS audit? and how long can IRS audit your taxes? scare you. Prioritize being proactive and keep a cooperative attitude to resolve the audit more efficiently, minimizing any threat or further complications. At times as stressful as these, it is vital to be transparent, cooperative, and calm to climb up to a unanimous decision.

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Author

Mr. Michael D. Sullivan

Michael D. Sullivan is the founder of MD Sullivan Tax Group. He had a distinguished career with the Internal Revenue Service for 10 years. As a veteran IRS Revenue Officer / Agent, he served as an Offer in Compromise Tax Specialist and Large Dollar Case Specialist.

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