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IRS Audit: How to Survive the Stress of a Tax Audit

It often comes unexpectedly: you start a normal workday answering emails and talking with a few business contacts. Then, the mail delivery comes, and you find the dreaded notification letter from the IRS. They want to audit your company to make sure that the tax filings match your business records. This news can be terrifying for many business owners, and you might feel overwhelmed by thinking about the things that you will need to do to prepare for the audit.

There is no reason to stress if you have an experienced accounting team to help with your business finances. These ongoing services are essential so that you can stay current with the financial information for your company. At the same time, tax planning is important to reduce the likelihood that you will be audited.

Are You Running a High Risk of an IRS Audit?

How do you know if the IRS will be auditing your company? There is no certain way to determine if you will be the lucky person chosen for the auditing process. But, there are a few things that can be done to minimize your risk. An accountant can help you follow the important tax laws, helping you stay under the radar each year.

As a small business owner, you run a higher risk of an IRS audit compared to someone who files an individual tax return without business activity. This increased risk doesn’t mean that you shouldn’t be pursuing your business efforts. Instead, you need to make sure that you are maintaining the right reporting and documentation to back up the financial claims if an audit happens.

Here are a few other red flags that might increase the risk of an audit:

  • If your profits were between $200,000 and $1 million in a fiscal year
  • Being a property owner and reporting rental losses
  • Showing a history of unaccounted income changes each year
  • Hiding foreign bank accounts or transactions
  • Large donations to charitable organizations

Even if these factors apply to your business, it doesn’t mean that you will be audited. In fact, it is estimated that less than 1% of small businesses are audited each year.

What is the Purpose of an IRS Audit?

If you have been selected for an audit, then you are probably asking a common question: why does the IRS want to review my business financials? The goal of the audit is to ensure the accuracy of the reporting, helping to claim unpaid tax funds if the paperwork was filed incorrectly. It has been estimated that there might be as much as a $125 billion gap in unreported income by business owners.

Just because you have been chosen for an audit, doesn’t necessarily mean that there is a problem with your tax filing. Instead, the IRS is doing routine checks to ensure the validity of the paperwork that has been filed. The selection process is based on a few red flags that might come up in a computer screening. There is also a random selection element based on a statistical formula.

The algorithms compare your business tax return against the “norms” for other similar companies. If anything looks out of place, then you might be selected for the audit. You might also run a higher risk of an IRS audit if you have any relationships with transactions related to partners or investors who were also selected for an audit.

What to Expect with an Audit

After you have been selected for an audit, an experienced auditor is assigned to review your paperwork. Keep in mind that audit notification is always done by mail. You will never receive a phone call notifying you of the audit. There are common phone scams right now that claim that you are being audited, but these calls are hoaxes and should be reported.

The audit can be handled by mail, or they might schedule a time for an in-person interview. This interview can be scheduled in a variety of locations, such as the IRS office, your place of business, your accountant’s office, or at your home. When the letter arrives, it will have specific instructions that need to be followed, as well as the contact information to schedule the meeting if necessary.

For audits that are handled by mail, your notification letter will contain a request for additional information. The letter will specify the details that need to be provided, such as documentation for itemized deductions, expenses, or income.

Regardless of the way the audit is performed, you will need to provide the requested information. The records may vary depending on your individual circumstances. Sometimes electronic records can be provided, such as the reports that come from your tax software. Other times, hand-copy receipts might be needed. By law, you are required to maintain all of the records relating to your business. This information needs to be stored for at least three years after the filing of the tax return.

Tax Audit Myths

Don’t be fooled by some of the myths about tax audits. Here are some of the common misconceptions that small business owners hear about the auditing process:

  1. Myth: Your risk of an audit increases if you file an extension. The truth is that filing an extension is as easy as clicking a button on the IRS website. People who are in the military or living abroad automatically qualify for an extension. In the situation where you request an extension, it shows that you are thorough and careful with your tax schedule. So, it doesn’t impact your risk of being audited.
  2. Myth: More deductions will increase the chances that you are audited. As long as you are deducting transactions that make sense, they shouldn’t impact your risk of an audit. Something out of the ordinary might put up a red flag though. For example, if you spend $30,000 on new computers for an office with a hundred employees, then it will likely be viewed as a normal cost of doing business. But, $30,000 for a month of travel expenses and business meals for one sole proprietor might raise some questions.
  3. Myth: Amend your tax filing, and you will be audited. The IRS wants the tax filings to be correct, so they won’t punish you for an innocent mistake. If you are correcting your mistakes on a return that is e-filed, then it is viewed as a good step. Then, the filing will be treated as if it was a new submission and scans are completed to see if there is anything that looks unusual. In the situation where you need to change a filing, make sure that you provide thorough explanations for the adjustments.

What to Do if You Receive an Audit Notification

So, what should you do if you receive the letter in the mail saying that you are going to be audited by the company? The first thing is to take a few deep breaths and know that everything will be all right. If you are working with a good accounting team, then it shouldn’t be a hassle to provide the requested information. So, make sure that you are always staying current with your financial tracking to ensure that you are prepared in case you are audited.

An audit means that your files are going to be reviewed to make sure that everything matches your tax records. When you have good documentation, there is nothing to worry about!

Now that you know that there is nothing to stress about, it is essential that you contact your accountant right away. Together, you can verify that the request is an official document from the IRS, and not some type of phishing scam. Your accountant can help you see if the letter came from a documented IRS address.

You don’t need to carry the burden of navigating an IRS audit without the support from a financial professional. In fact, the outcome will be better if you lean on the expertise of your accountant during this process. Your accountant will understand the procedures and practices for IRS audits, and they can guide you through the steps to provide the information that is requested by the IRS.

An accountant will help you understand the audit and help you see any potential roadblocks that need to be addressed. Getting insight into the process will ensure that you are thoroughly prepared when it is time to sit down with the auditor.

It is important that you gather the requested documents. If you need to send the documents in the mail, then it is best to keep the originals and mail photocopies of the receipts and paperwork. You should always maintain the original documents in your files. Providing a detailed paper trail will ensure that the audit goes as smoothly as possible.

Do you have questions about tax planning, filing or audits? Then you need the support of an experienced accounting team. At Easier Accounting, we offer these services for small businesses and start-ups. Contact us to learn more about the ways that we can support your business efforts. We are here to help: (888) 620-0770

Watch Out for These Common Tax Scams

Taxes can be a touchy subject for individuals and business owners, and many people agree that their stress levels go up when they think about tax filing or payments. Even though taxes can be unpleasant, they are a necessary part of owning a business. If you don’t like dealing with tax paperwork, then the best thing that you can do is hire an experienced accounting and bookkeeping team to handle the details for your company.

Scammers know that people get stressed about their taxes, so it is common for scammers to use this angle in an attempt to gather your information or steal your money. A phone call or email from a scammer that mentions your recent tax filing could be a stressful experience. Unfortunately, many people make the mistake of complying with the scammer’s requests before talking to their accountant.

Why Do Scammers Focus on Taxes?

There are a variety of reasons why scammers use the topic of taxes. Not only will the topic of tax payments make people pay attention to the conversation, but many individuals will be compliant with the scammer’s requests. People don’t want to get in trouble with the IRS, so they often follow instructions when they believe that the person on the other line is calling from a reputable organization.

Tax scams have become so common that the Internal Revenue Service formed a security summit with the tax industry and state tax departments. This summit was formed in 2015, with the goal of fighting against tax crimes. Information is shared to keep the public informed about potential new scams.

Tax scams open an opportunity to get money from innocent people who think that they are making a tax payment. Another form of fraud occurs when the scammer gathers personal information and then uses those details to file fraudulent tax returns to get the refunds.

Types of Tax Scams

How do you know if you are the target of a tax scam? The best thing that you can do is stay informed about the trends in the industry. This information will help you identify the potential warning signs that someone is trying to scam you. Here are a few things that you can watch for:

  • Suspicious Emails: Be careful if you receive an email referencing your e-Service account closures. Many people file their taxes online, and then the scammers take advantage of the situation by sending messages about an account closure or a blocked e-Service account. Examples of these email headlines might include:
    • 24 Hours to Block Your Account
    • Your Account is Terminated
    • Few Hours to Close Your Account
    • Your e-Service Account is Closed
    • Account Closure!
  • Electronic Links: If you receive a tax scam email, then it might contain an electronic link that goes to a fake e-Services login page. The goal is to gather the credentials that you type into the fake website. Even if the link looks legit, it is best to go to the source (the e-Services website) instead of clicking on a link within an email. There are times when these messages look authentic with a face “IRS gov e-Services” logo or signature at the bottom. The website URL might include “IRS” or other seemingly applicable words. But, the link is hosted on a scammer website designed to gather your information. Never open an attachment or link that comes through a questionable email.
  • Software Provider: Another type of tax scam email might look like it is coming from your tax software provider. If you filed taxes without the help from an accountant, then you likely used a popular tax preparation software. Scammers sometimes mimic these software providers in phishing emails, asking users to update their online profiles. When you enter in the information, you will be providing your details to the scammer. These phishing emails can also appear to come from other reputable sources, such as the IRS, credit card companies, banks, and more.
  • Phone Scams: Criminals sometimes impersonate IRS agents by pretending to call about your tax filing. Often, these phone calls come through in a threatening way, which scares individuals into providing information over the phone. Recently, there has been a surge of these phone calls, and the IRS has issued warnings for people to be careful if they receive a phone call regarding tax issues. These threats might include deportation, police arrest, fees, or garnishment. The best thing that you can do is hang up the phone!
  • Identity Theft: It is possible that you could be the victim of tax fraud without realizing that there is a problem. This scam involves filing a fake tax return using someone else’s social security number. The IRS is working to fight against this problem, but can still happen if the wrong person gets their hands on your social security number.
  • Fraudulent Return Preparers: If you don’t want to go through the hassle of filing your tax return, then it makes sense that you should hire an accountant to help. But, you need to be cautious about the person that you choose to hire. Most tax professionals offer legitimate, honest services for businesses and individuals. But, there are a few bad eggs in every industry. These fraudulent shops are designed to commit refund fraud and steal information from taxpayers. So, it is wise to do your homework and learn more about your tax professional before handing over your personal
  • Signing a Blank Tax Return: One red flag that might indicate that you are dealing with someone who is a scammer is if they ask you to sign a blank return. There are times when the preparers make promises about inflated tax returns, so individuals will sign the black form with the hope that they will receive more money. Be cautious and make sure that you can see the numbers before signing on the bottom line.

Protecting Yourself and Your Business

What can you do to keep your business protected? Instead of waiting to be a victim of a tax scam, there are a few things that you can do to prevent the problems in the future. For example, it is a good idea to change your e-Services credentials on a regular basis. Use a strong password and change it immediately if you suspect that someone might be targeting you.

Never make the mistake of providing personal information if it is requested via email. These emails can be dangerous, and you should stop immediately if you see this type of request for information. If the IRS needs to talk to you about your recent tax filing, then they will send an official letter.

Another common mistake to avoid is opening attachments or links from a source that you don’t recognize. The attachment in the email could contain a virus or malware designed to gather information from your computer. Avoid clicking on the link, and never “reply” to the email.

A tax professional can provide the advice that you need to determine if you are receiving a legitimate message from the IRS. So, if you have a concern, then the best thing that you can do is pick up the phone to talk to your accountant. Make sure that you are calling your accountant directly, instead of using the contact information in the questionable email.

If you want to do your part to help other people avoid tax scams, then you might consider sending the suspicious emails to the IRS. They have an email address to gather this information: phishing@irs.gov. After the email has been forwarded, you should delete the message from your inbox.

Honesty in Your Tax Filing

It can be stressful to face an audit or problems with the IRS, so it is important that you are honest in the way your taxes are filed. Even if you aren’t being scammed, there are things that you could do which will potentially raise red flags for the IRS. Be careful to make sure that you are working with an experienced, trusted accountant.

Common tax fraud mistakes can be used to help you maximize your return and avoid expensive payments. But, these things could put you at risk if you aren’t following the rules established by the IRS. For example, inflating deductions or falsifying income could lead to big problems in the future. Keep yourself protected by working with an accountant who follows the rules and files the taxes according to the guidelines.

If you need a trusted accounting team to help with your tax paperwork, then Easier Accounting is here to help! We would love to assist with anything that you need. We invite you to contact our team to schedule a consultation and learn more about the services that we offer. With many years of experience in the accounting industry, we have the knowledge that you need for your small business or startup. Call us for more information to see if these services are a good match for your company: (888) 620-0770

Why You Need a Professional Accountant to Help with Your Business Tax Preparation

As a small business owner, it is essential that you keep up with all of the tax requirements for your company. Are you putting in the time and work that is necessary to keep up with your financial goals? There are a variety of tax rules and payments that need to be considered, and it is easy to feel overwhelmed by everything that needs to be done:

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  • Quarterly tax payments
  • Payroll taxes
  • 1099 forms
  • W2 forms
  • Annual tax preparation
  • And more!

It seems like the list is never-ending, and there is always another form or payment that you need to remember.

Let the Professionals Handle Everything for You

Instead of worrying about your tax forms and preparation, it is better to focus on what you do best: managing and expanding your business. It can be a burden to carve time out in your schedule in order to get your tax stuff done, which is why you should consider a professional bookkeeper and/or accountant to help.

You will be amazed to see how easy it is to outsource your bookkeeping and accounting tasks, which frees up your time so that you can focus on other responsibilities within your business. These services include monthly bookkeeping and tax consulting, and you can also choose other services such as audit support and tax preparation.

January Tax Forms are Due Soon

Don’t forget that you need to have your 1099 forms and W2 forms sent out to employees and contractors before January 31st. If you don’t have time to get these forms done before the end of the month, then right now might be the perfect time to get started with bookkeeping and business accounting services.

Remember, you need to be planning ahead for your business tax preparation and your personal income tax preparation. It can be a stressful time to plan everything that you need, but this stress can be reduced with monthly bookkeeping services and the ongoing support from a financial professional.

If you are ready to take your business to higher levels of success in 2016, then you need to make sure that you have the right financial system in place. These services can be customized to meet your individual needs, including cash flow management, invoicing, payment management, payroll, tax preparation, and more. For more information about the bookkeeping and accounting services that can support your financial goals, then we invite you to contact us at Easier Accounting.

Call us today at: (888) 620-0770