Going through a tax audit is a fear for most taxpayers — especially business owners. The process involves the Internal Revenue Service (IRS) or state taxing authority figuratively and literally digging through your income tax returns and IRS documents to look for reasons to assess more taxes, thereby interrupting filers’ lives and business operations and making everyone miserable.
Audit defense services exist to give you peace of mind, and those who use them often save time, money, headaches, and themselves from having to deal with IRS agents. The following guide will provide more information about the audit process, tax audit defense services, and why your business may want to invest in them.
What Is Tax Audit Defense?
Tax professionals, online preparation services, and tax prep software providers typically offer tax audit defense services, which is like insurance for filing your tax return. You pay additional fees for audit defense protection, just like you pay premiums for homeowners’ insurance to protect your house if it suffers major damage from some event. The audit defense service add-on promises to help you if you face an IRS or state audit of tax returns you filed with the professional, website, or software provider, though the exact type of support and actions each provider takes during the audit process varies.
Examples of some services that might be a part of audit defense include:
- Responding to audit notices on behalf of an individual or business
- Attending hearings or meetings with auditors on behalf of the filer
- Resolving tax liability, identity theft, and criminal activity related to the audit
- Paying penalties for audits that are the result of a tax professional’s or tax software’s mistake
Your chances of getting audited by the IRS are relatively low. Historically, less than 1 percent of all tax returns get audited by the IRS, but the rate increases with income. For example, the IRS audited more than 6 percent of all 2017 returns with adjusted gross incomes greater than $10 million and only about 0.7 percent of returns that had adjusted gross incomes below $25,000 for the tax year.
Income is not the only factor however, and understanding what goes into a tax audit can help you decide if audit defense protection might be a good idea for your situation.
How an IRS Tax Audit Works
The IRS approaches audits in a few different ways, but, any should take correspondence you receive from it seriously. Here is a broad overview of how each main type of audit works:
The least intrusive tax audit is simply a letter from the IRS. The audit notice usually requests supporting documentation for a deduction, credit, or another aspect of your return. Once you mail in the requested documentation, it’s likely your issue will be resolved. If you do not have the requested proof, you can choose to pay the difference and close your case or fight the issue with the IRS. It’s imperative that you take action when you receive the first notice so you don’t incur penalties.
IRS Office Audit
If the IRS wants to speak with you directly concerning your tax return, it will request you visit one of its offices for an interview with an audit representative. This is a more serious matter than a letter and should be viewed as a complete audit. The IRS schedules an appointment on a specific date and time and a specific office. You must attend the meeting, but you can also bring a tax professional or legal representation.
IRS Field Audit
Field audits are serious like office audits, but your friendly, neighborhood IRS agent comes to your home, business, or accountant’s office. These audits are general audits that are not limited to specific line items on your returns. Instead, the agent goes through ALL of your tax return information. The IRS does do field audits on individuals, but businesses must undergo field audits more often.
Why Businesses Need Tax Audit Defense
A tax audit costs businesses time and money and involves mountains of paperwork. In the event of an audit, you can expect the process to take from a few months up to two years. The law provides auditors up to three years to perform your tax audit and assess additional taxes.
It’s important to note that tax audits typically do not turn out in your favor. You might provide all the documentation and tax forms requested, and the auditor might not assess more taxes, but it’s highly unlikely he or she will increase your tax refund or decrease your tax debt.
Additionally, if you are not happy with your audit results, you must wait 30 days before you can appeal the auditor’s decision. You will need to file a request under the Freedom of Information Act to receive the auditor’s records so you know the information that is on file, then sift through that information to determine where the issues reside.
Having tax audit defense helps you save time and money by letting professionals deal with the audit process. Audit representation also increases the likelihood that you do not need to spend the extra time for an appeal.
Why You Need an Audit Defense Provider You Can Trust
Having an audit defense provider you can trust ensures you face the IRS with the best defense possible, and you actually save time and money by using the service. Most importantly, working with a trusted tax advisor can help you make sure you are prepared and protected as you go through the audit process. CPAs and other tax professionals understand tax law and know how to apply it to individual and small business tax returns to save clients time, money, and potentially reduce their tax debts.
You do not have to feel overwhelmed or struggle with an IRS audit. Instead, contact Silver Tax Group today to discuss your tax audit defense questions or to speak with an expert about other tax-related questions you might have.