Schedule C Audits & Tax Audits—What Should You Do?
It’s happened; you are being audited by the IRS. Just the thought of a letter from the IRS strikes fear in the hearts of many and raise blood pressure levels. It is daunting, intimidating, time consuming, and stressful. Worst of all, an audit is a distraction from what you need to be doing—growing your business.
A business is mostly flagged for audit when their exempt sales ratio is out of range with other companies within its industry. Another reason is writing off an expense not ordinarily taken for your type of business, and in other cases they are simply chosen at random.
What Exactly is an Audit?
It is an examination of your organization or individual accounts and financial records to ensure the information has been reported correctly and verification that the correct taxes have been paid.
The IRS will leave no stone unturned in their quest to insure you have paid what you owe. Your tax return will be scrutinized for accuracy, and if you don’t comply with the Auditor’s checklist, the IRS will recalculate your tax and send you on your way with a hefty tax bill as your souvenir of the experience.
What is the Biggest Mistake You Can Make
When Dealing With an IRS Audit?
Is a CPA Expensive?
It is a matter of perspective. Consider how your CPA can come alongside you in business. A CPA can:
Not knowing your rights. Auditors play on your inexperience with audits and often get more information from you than you have a legal obligation to provide. How do they do it? First, they know you are nervous and likely don’t know your rights and they use this to their advantage.
“I’ve seen it happen so many times, people panic and share more than they are required to, often opening themselves up for a deeper inquiry, longer process and with considerably more expense.”
Quips Melanie, of Tax Wizards East
How Many Years Can the IRS Audit?
The good news; there is a statue of limitations for IRS audits. The break down is 3-6-forever. Here is how it works:
- Three years and this is the standard. Common practice with an IRS audit is to go back three years. This is standard practice. It’s important to understand the date the statute limitation starts. To read more on this topic, click here. The statue for any given tax return is three years from the due date of your taxes. If you file early, the due date is your statute of limitations. However, if you file an extension to October 15 (the last date you can file for the year) that is the date you count from.
- Six years for large understatements of income. If you understate your gross income by more than 25% they can go back up to six years. The understatement may be unintentional, but it opens the door to a six year audit. NOTE: The IRS, whether intentional or not, could view this as fraudulent and could audit for an unlimited number of years.
- Unlimited Years. If the IRS determines you have committed fraud, there is no statute of limitations and they can go back as many years as they see fit. It can be a nightmare and cost you tens of thousands of dollars.
How Do People Understate Their Income?
Here are a few ways you might not realize could affect you and your business, these are just a few:
- Selling a piece of property or stocks.
- Offshore income and investments or inheritances.
- Not reporting a 401K or IRA distribution.
- Income from a Rental property.
- If you didn’t get a 1099, therefore didn’t report the income. You are still required to report this income and the IRS finds out when the company reports, and doesn’t send you a 1099.
Penalties are Painful.
Understatement penalties can be significant. If you fail to pay what you owe, they can charge up to 25% of the unpaid tax each month. And they do. If you fail to pay the taxes after an audit within 21 days, the IRS will charge YOU additional penalties of .5% for each month you are late in paying taxes.
“Understatement penalties are very difficult to abate. I’ve had some success with requesting the IRS to remove and abate.”
Melanie Gebers, Tax Wizards East
Tax Wizards East Gets YOU Back to Work
With over twenty years’ experience, we know your rights and how to handle IRS tax auditors. In most cases, you won’t have to talk to them at all, we will handle the audit, and you can do what you are supposed to be doing — working on your business.
If You Have a Letter From the IRS, Call Us Today.
We Will Handle the Rest.