How to Minimize the Risk of an IRS Audit

This option requires advance payment of the entire tax amount at issue, and legal counsel is virtually indispensable. These issues are beyond the scope of this brochure, but if your case involves significant dollars, you may want to discuss the options with a qualified tax attorney. In every audit, the IRS starts how to handle an irs audit out by reviewing the information on your tax return to make sure you’ve reported your income correctly. The next step is to compare your return to the information the IRS has on file. You should always seek the help of an experienced tax professional if you’re aware of a severe problem with your tax returns.

Individuals whose income fluctuates significantly from one year to the next can also find themselves in the IRS’ sights. This can be the case for those who are self-employed or own a business. Big changes in income are a huge red flag for the IRS because they sometimes signal underreported income, either in the current year or in previous years.

Working with the IRS during the Audit Process

The best way to begin preparing for your meeting is to pull out your copy of the return being audited. Before the IRS puts your forms to the test, do the deed yourself. And to get an idea of the IRS’s methods, check to see if there’s an IRS audit technique guide for your business or industry. These manuals are designed to help IRS agents understand how various kinds of businesses work and what to look for when going over a return.

• Most personal tax returns are not audited, which means your chances are pretty small unless you own a business.
• We’ll show you both, so you can handle your IRS letter smartly.
• A. There are various options available to you if IRS says you owe more tax.
• The Cohan rule allows taxpayers to prove by “other credible evidence” that they actually incurred deductible expenses.
• The IRS selects returns that are the most likely to have errors.
• Also remember that there may be room for compromise on the issue at hand.
• Regardless of whether you notify Colorado, the IRS will furnish the audit information and results to Colorado on magnetic tape.

Winnings are added as “gambling income” on line 8 of your Form 1040, Schedule 1, although these forms are filled out automatically by tax software based on your answers to a questionnaire. A request for an interest adjustment must be made by way of a claim for refund (using IRS form 843) after the Service Center has billed you for the deficiency that you have agreed to. The examiner will not be able to consider your request for interest reduction. The IRS has generally been very reluctant to grant interest adjustments.

Definition of IRS Audit Letter

Have supporting documentation for any deduction on your tax return, especially those that are significant or subject to special rules, such as rental losses. You can’t always avoid an audit, but thorough records that support your deductions can quickly appease most auditors. Turning a profit can be challenging for any business, especially those just getting off the ground. However, the IRS will take notice if you claim losses year after year or if a loss is substantial. You’re less likely to be audited in the first few years, when losses are normal and expected. Over the longer term, though, businesses are supposed to make money—and if yours doesn’t, the IRS will want to know why.

Understanding these methods can provide insight into the audit selection process. Your gambling winnings and losses are reported separately on your tax return. The winnings you claim as income include the cost of gambling, or the original wager or bet, says Romeo Razi, a certified public accountant based in Las Vegas. Don’t expect Appeals to give away or settle issues that you could not support or substantiate in the audit.

How to Handle an IRS Audit

Instead of itemizing, nine out of 10 people take the standard deduction, since it’s a generous $14,600 for single filers and $29,200 for those married filing jointly for 2024. For most people, itemizing gambling losses won’t save you as much money as simply taking the standard deduction. Back in 2014, Rep. Steve Stockman of Texas introduced a bill he called the “The Dog Ate My Tax Receipts Act,” to allow us all to try out some excuses. Rep. Stockman said, “Taxpayers should be allowed to offer the same flimsy, obviously made-up excuses the Obama administration uses.” The bill never went anywhere. But had it passed, it would have allowed taxpayers who do not provide documents requested by the IRS to claim that “the dog ate my tax receipts,” and numerous other silly sounding excuses. The point is, no taxpayer should ever feel or assume they are being audited for “personal” reasons.