Smashing the Misconceptions of Audit Flags + 6 Top Audit Triggers
Tiffany Huntington, EA and the Purely Solutions Tax Team
February 27, 2020
Understandably, some of the most common concerns we hear at Purely Solutions are “is this a flag?” and “I don’t want to get audited.”
While there’s no way to control who will be picked for an audit and when, we can help you become equipped with tools and record-keeping best practices to stay in compliance in the event an audit does arise.
But first, here are some of the most common misconceptions regarding audit flags.
Misconception: “I raised a flag because I filed an extension, am getting a refund, or filed an amended return.”
Reality: An audit is a review of account and financial information that can be prompted through random selection, computer screenings, and comparisons, or due to findings when other issues arose during an audit of another business or partner for example.
Misconception: “I got a call from the IRS saying I was audited and need to make a payment over the phone.”
Reality: Be cautious of scams. IRS will always notify you by mail first and will provide you with a written request for specific documentation to prove previous claims such as income and deductions.
Misconception: “I filed that years ago and don’t have to keep the receipts anymore.”
Reality: Generally, IRS can audit returns filed within the last three years. However, if they identify major issues or fraudulent activities, this statute of limitations can change allowing IRS to open up more years.
So, you might be wondering, what does trigger an audit?
Our partners at Gusto suggested that the top triggers for audits can include:
Compliance issues from another audit such as for sales and payroll tax, unemployment and worker’s compensation issues, etc.
Handling lots of cash which can appear as intentionally misreporting income
Disgruntled employees that may report their employer
Operating a business in certain industry types
Higher ratios of tax-exempt sales when comparing total sales
Not paying tax on certain purchases
Check out their article here.
Benefits of disaster-proof and audit-proof record-keeping
While some people and businesses are more likely to get audited than others, the good news is that by maintaining disaster-proof and audit-proof records, you can be confident in the accuracy and compliance of your tax returns in the event of an audit.
Disaster-proof: Let’s face it, things happen. From floods and fires, to theft, to simply losing or spilling coffee on your receipts. Keeping only paper copies of documents exposes you to the risk of losing those documents in the event of an unforeseen disaster. We recommend using cloud-based document storage tools to backup your data electronically so that accessing your documents doesn’t require actually having those pieces of paper in your hand. These tools also make it easier to sort, organize, and share your documents. At Purely Solutions, we offer several solutions to help you maintain disaster-proof digital records, including accounting, payroll, and receipt tracking.
Audit-proof: Having digital copies of all your receipts and bills also makes for a far less chaotic audit experience. Imagine being able to quickly locate a document you’re looking for with just a few clicks, versus having to shuffle through boxes of folders to find it. Our solutions are designed to make your record-keeping process as easy and painless as possible all year round, so that you’re compliant and more than prepared for an audit. Learn more about our services here.
And please remember, you’re not alone! If you receive notification from the IRS regarding an audit, be sure to reach out to your Tax Team at Purely Solutions. We can help you through the process by providing insight, helpful resources and documentation, experience, and representation rights to assist you.
We'd love to hear from you! Feel free to drop us a line here.
Helpful resources: https://www.irs.gov/businesses/small-businesses-self-employed/irs-audits