What to Expect during an IRS Audit

During an IRS audit, the auditor is going to be looking for a number of items that will prove or disprove your filing. The auditor may look at your bank accounts as well as other personal records to determine if you have committed tax fraud or have filing discrepancies.

The IRS auditor will want to know if you reported all of your business sales and receipts. They will be looking for bank records to support the income amount reported. The auditor may look for large sum deposits, then ask for documentation from the month that the deposit happened in. Additionally, they are going to be suspect to any cash transactions, especially the larger ones. For sales purposes, the IRS auditor can even judge your lifestyle to see if you’re living beyond the means of the self-employment or business income that you have reported. If this is the case, they may ask how you are affording pperhaps a $6,000 monthly mortgage when your total sales per month are only $2,000. Be prepared to rebut this assumption with credit card receipts, spousal income or other possible explanations. Remember however, that money gifted to you may sometimes be required to be reported as income. Winnings are sometimes required to be reported as well. For this reason, it is not recommended that you allow the IRS auditor to visit with you at your home or office.

Additional questions that you may be asked or that the IRS auditor may be looking for is whether or not you claimed expenses for travel that were not business related. Additionally, the IRS auditor may be looking to see if you claimed personal living expenses as business or home office expenses, if you claimed large and extravagant entertainment expenses, if you properly made payroll tax deposits and if your workers are properly classified such as independent contractors or w-2 employees.

As long as you are prepared to produce the documents and you volunteer anything in question, you should be okay. Take your time to digest the requests, and then think strategy. The goal is to prove that what you stated is fact. Show the IRS auditor why the expense was for the business or why the employee is classified the way they are. Make sure that you are educated about the topic before offering or volunteering any information. Research the subject or get some advice from a tax professional if needed. Request more time if you need to comprehend what is being asked for and to gather the documentation to support your return.