Q. What is an audit?
A. The Internal Revenue Services (IRS) examination of an individual or a corporation’s tax return to verify its accuracy. It is the tax payer that is responsible for providing all support of records, so it is encouraged that the taxpayer maintains good records.
Q. If I receive a letter from the IRS notifying me of an audit, what do I do?
A. We recommend that our clients first send us a full copy of the IRS letter by fax or email so that our Senior Tax Consultant can give you the best advice on how to proceed. We do not recommend you contact the IRS without speaking to us. Often, a taxpayer does not know the proper verbiage to use with the IRS and can find themselves confused, hindering the resolution, or affecting their case in a negative way. We will prepare you a Power of Attorney form which gives our Tax Consultant permission to represent you.
Q. How long do audits last?
A. Audits vary in length. They can last anywhere from a couple of weeks to months. The amount of time required depends on the audit scope, the ease in obtaining the required information, and the quality of the client’s records.
Q. What is the best way to avoid an audit?
A. The following situations can make you more susceptible to an audit: Failing to include a 1099 or other income, inflating home office deductions, claiming disproportionately high charitable donations, reporting rental real estate losses when you don’t materially participate, or citing too many business related expenses. Of course, there is no absolute way of avoiding audit but paying attention to these factors may greatly reduce your risk.
Q. What is the PHD Tax Audit Protection Plan?
A. With the purchase of an Audit Protection Plan, you are insured for that respective tax return to be fully represented in case of an audit. From the beginning of contact with the IRS Agent to the Final Audit Report, we will assist and inform you of all correspondence and decisions. An Audit Protection Plan is purchased at the same time as your tax return preparation. The insurance is a minimal fee for those who feel they may benefit from this service and it is available to everyone.
Q. What is included in PHD Tax’s Representation during an audit?
A. All initial correspondence with the IRS Agent which not only clarifies what their reason is for auditing you but when and where the first meeting will be. The meetings will most likely take place at our office in Kirkland, WA. Our qualified Representative will research all related tax law to present to the Agent and support your tax return for the best possible result. There could be several additional meetings between the IRS Agent and your Representative, depending on how complicated the examination. Should the Final Report from the IRS return to us unsatisfactory, we will continue the process into an Appeal if it is in your best interest to do so at an additional fee. Of course, all steps taken throughout the audit are explained and authorized by you. We guarantee all of your questions will be answered.
Q. What sort or records should I be keeping and for how long should I keep them?
A. The items below as well as your income tax returns should be kept for seven years.
- Form(s) W-2
- Form(s) 1099
- Any invoices for income
- Bank statements
- Brokerage statements
- Form(s) K-1
- Sales slips
- Canceled checks or other proof of payment
- Written communications from qualified charities
- Closing statements
- Purchase and sales invoices
- Proof of payment
- Insurance records
- Receipts for improvement costs
- Brokerage statements
- Mutual fund statements
- Form(s) 1099
- Form(s) 2439
IF you… THEN the period is…
1. Owe additional tax and 3 years
(2), (3), and (4) do not
apply to you
2. Do not report income that 6 years
you should and it is more
than 25% of the gross
income shown on your
3. File a fraudulent return No limit
4. Do not file a return No limit
5. File a claim for credit or The later of 3 years or 2 years after tax was paid
refund after you filed
6. File a claim for a loss from 7 years
Most of this information can be found on the IRS website.