Navigating Personal Tax Audits: A Guide for Taxpayers

Tax form showing audit notice

Taxes – the annual puzzle we all try to solve without pulling our hair out. A few late nights and working with an expert in the field may do the trick. But, what happens when the taxman wants to take a closer look? That’s where personal tax audits come in. And trust us, we’ve seen them make even the bravest taxpayers break a sweat.

Justifying the deductions and credits you’re probably rightfully entitled to can be far worse than having spent the money you’re claiming. Fortunately, there are ways to navigate audits to ensure that you handle the process effectively. Our CPAs have helped many individuals both of high net worth and in personal capacity, manage finicky tax audit processes. We have found that clients who work alongside a CPA in this regard have a slightly more streamlined process when it comes to navigating audits. For this reason, we delve into the intricacies of personal tax audits.

Understanding tax audits: unpacking the basics

A tax audit, simply put, is an examination of your financial information and activities to ensure they align with the tax laws and regulations. Thus, it is essentially the IRS reviewing your financial records to verify the accuracy of your reported income, deductions, and credits. It’s not about finding fault; but rather about ensuring everyone is adhering to the rules. Still, this doesn’t make it any less stressful; and even CPAs agree that avoiding an audit is always easier. That is why it can be helpful to avoid some of the common audit triggers such as anomalies in your tax return or unusually high deductions. But, even still, there’s a chance you could get audited by random selection.

Types of tax audits

Understanding the nuances of different types of audits can help take the edge off if you ever find yourself in the audit spotlight. 

  • Correspondence audits: These are the mildest form of audits, usually to iron out simple discrepancies in your return. The taxman sends you a letter seeking clarification or additional documentation.
  • Office audits: This audit is a step up, where you’re asked to visit an IRS office for an in-person review. It’s often about more complex issues that can’t be resolved through a letter.
  • Field audits: This is the most comprehensive audit type. An IRS agent comes to your home or business to conduct the audit. Typically reserved for more intricate situations.

How to prepare for a tax audit

Once you’ve received that dreaded notification it is important to take a proactive approach and start your preparation process to ensure a smooth running audit. For this reason, keeping accurate and organized financial records is your first line of defense.

1. Keep organized records

Accurate records not only provide a clear snapshot of your financial activities but also show that you are committed to compliance. Our CPAs advise you to start by organizing your income statements, receipts, and any supporting documentation that backs up your reported figures.

2. Keep important documents on file

Whether it’s a charity donation, business expense, or your employment records; having a paper trail is the backbone of successful audit-prep.

3. Know your rights

Facing an audit doesn’t mean surrendering your rights. Fortunately, as a taxpayer, you have the right to:

  • Professional representation: You can choose someone, like your CPA, to represent you during the audit.
  • Confidentiality: Your personal and financial information is protected. Thus, the IRS can’t disclose it without your consent.
  • Appeal the decision: If you disagree with the audit’s outcome, you have the right to appeal.

4. Communicate

Respond promptly to audit notifications, and if you need more time, communicate with the IRS. Being cooperative and transparent can work in your favor.

Best practices to follow during and after an audit

An audit isn’t a personal affront; it’s a standard procedure. Thus, being prepared and learning from the process will help you. 

During the audit

  • Be transparent: Maintain a cooperative demeanor and provide requested documentation promptly. 
  • Seek professional guidance: Your tax professional can provide valuable insights and ensure compliance.

After the audit is complete

  • Review the results: Understand the adjustments and be prepared for potential payments or refunds.
  • Implement the requirements: Work with your CPA to develop a feasible payment plan. Additionally, if you’re entitled to a refund, ensure it’s processed timeously.
  • Learn from the experience: Understand the factors that triggered the audit and work with your CPA to implement practices that minimize the risk of future audits.

How partnering with a CPA can help 

Navigating a tax audit can be stressful, but working with a seasoned CPA can help to alleviate some of the uncertainty. From the moment that audit notice arrives, your tax professional helps you decode the communication to provide clarity.

As the audit process unfolds, your CPA helps to facilitate the upcoming audit discussions. As such, they have to ensure that you know exactly what to expect and how to effectively present your case. 

In the event of an in-person or field audit, your tax professional will address questions and ensure that you are well-represented throughout the process. Finally, as the IRS issues its final determination they will interpret the and guide you on the next steps.

Navigating the audit process can be complex, but having a tax professional on board ensures that you are well-represented at every stage.

Fusion CPAs have facilitated countless audits for businesses, personal taxes, and high-net-worth individuals. We are confident with complex cases and can implement accounting software to help you track your finances to ensure accurate records. Contact us for help today!

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This blog article is not intended to be the rendering of legal, accounting, tax advice, or other professional services. We base articles on current or proposed tax rules at the time of writing and do not update older posts for tax rule changes. We expressly disclaim all liability regarding actions taken or not taken based on the contents of this blog as well as the use or interpretation of this information. Information provided on this website is not all-inclusive and such information should not be relied upon as being all-inclusive.

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