If you’re self-employed, you’re wearing a lot of hats. Your calendar is full and so is your to-do list. The last thing you want to see is a U.S. Department of Treasury letter informing you that your business has been selected for an IRS audit. Because self-employed taxpayers report their income on Schedule C of their personal tax return, an audit can be particularly stressful, even if the taxpayer has done everything right.
CPA Practice Advisor recently published an article discussing self-employed tax audits, and explained, “Schedule C tax return amounts are presented in a summarized fashion, [so] you can expect the IRS to be interested in the details supporting the summarized amounts.”
75% of personal income tax returns that are pegged for audits are done through correspondence — meaning that the taxpayers simply must provide the requested details and documentation. For example, the IRS may want to see mileage logs or documentation for business travel. These audits are an inconvenience, but aren’t extensive.
25% of personal income tax audits are field audits, and these are the ones that take up the most time and cause the most stress for self-employed taxpayers. In a field audit, the IRS comes to the taxpayer’s home or place of business for an extended period of time. In these audits, the IRS is looking at everything, and the taxpayer will be required to provide significant time and effort, and will need tax expertise.
If you’re selected for a field audit, you’ll want to contact your tax professional. Although you may be able to handle many elements involved, this type of audit isn’t something you want to conduct completely on your own. Here’s what CPA Practice Advisor recommends you request help for:
- Gauging the scope of the audit or, if the scope is unclear, provide the initial contact with the IRS auditor to clarify and possibly influence the scope of the audit.
- Assisting in quantifying areas of potential tax exposure and, where advisable, become proactive in disclosing errors to avoid the imposition of IRS penalties;
- Actively asserting reasons why the business owner’s treatment of income and deductions is proper under the law.
- Identifying areas of missed opportunities where deductions were inadvertently omitted or, in the alternative, capable of being accelerated.
- Determining whether the IRS auditor’s requests are unreasonable and worthy of being curtailed.
Although a field audit is stressful, you can have confidence that you won’t make any costly mistakes if you have a qualified tax professional assisting you. You’ll also have an advocate at your side. And most professionals are flexible with how much help you’d like, if you want to handle some of the legwork yourself.