In an ideal world, you’ll never get audited by the IRS but it’s best to be prepared in the event that It does happen. Not only does it help an audit feel less daunting, but making sure you know what’s expected from you in an audit helps promote good financial health and habits.
What Happens During an Audit
When the IRS requests an audit, they ask you to present specific documents that support the income, credits, and/or deductions that you listed on your tax return. Since you used all those documents to create your return, you should not need to collect other information or make anything new.
Audits can be conducted in person or by mail. Your audit notice will inform you of the method with which to submit your documents. For in-person audits, MCK is happy to set up the agent with a space at one of our offices and oversee the audit.
How Documents Should Be Organized
When you are gathering the requested documents, please organize them to help speed up the process and prevent any errors or misunderstandings. The IRS prefers that the documents be organized and labeled by year, type of income or expense, and with an included summary of transactions. They prefer that they be ordered according to their request list.
What Records Could Be Requested
Every audit is different so the records requested vary from audit to audit. No individual record can stand on its own and you must include circumstances surrounding any documents you send; also, it is vital that you only send us copies of the requested documents. You should retain all original copies.
Here’s a list of the type of documents that might be requested:
Bills – Make sure to include the name of the person or organization receiving the payment, the amount, and the date that the payment was made.
Cancelled Checks – Cancelled checks should be grouped with the copies of the bills paid with the checks and any applicable employer reimbursement.
Employment Documents – These can include anything from W-2 statements, policies and reimbursements to uniform policies.
Legal Papers – For these documents, include details of what the case was about, what happened and how it related to your business. Some examples include: divorce settlements, custody agreements, criminal or civil defense papers, property acquisition, or tax preparation or advice.
Loan Agreements – These documents are a little more complex and you will want to include the following with them:
*Name of the borrowers
*Location of the Property
*Institution that made the loan
*Terms and months of the loan
*Tax year statement listing the interest paid
*Breakdown of how the money was used
Logs or Diaries – If you keep logs or diaries that provide information about anything pertaining to your financials, make sure to include these. This includes any records of travel, mileage, gambling debts and winnings, job-hunting activity and related expenses, and more.
Medical and/or Dental Records – These can include medical savings account statements, copy of handbook showing benefit or reimbursement policies, physician statements, capital improvements for medical records, and/or contract for dependent care.
Receipts – One of the most common records requested; receipts should include notes about what the charge was used for and how it relates to your business.
Schedule K-1 – These are used to report a shareholders statement of gains, losses, deductions, and credits.
Tickets – Tickets should be labeled with business purpose for the trip and should be grouped with other receipts from the same trip.
If your audit is being conducted by mail, you will also have to fill out a few questionnaires:
*Schedule C – General Questionnaire
*Schedule C – Car and Truck Questionnaire
*Schedule C – Travel, Meals and Entertainment Expense Questionnaire
*Schedule C – Repairs and Maintenance Questionnaire
Audits can be intimidating but they don’t need to be panic-inducing. With this guide and the help of MCK, you can rest knowing that you will be prepared if an audit ever comes your way.