3 Steps to Begin Preparing for an IRS Audit – April 20, 2022 by Mike Kolk

With the April 18th tax deadline just behind us, it’s timely to note that filing a return is not the end of the story for taxpayers who have “their number” called for an IRS examination.

While in recent years there has been a severe staffing shortage at the IRS, followed by the perceived notion of a lower likelihood of being audited, that is all about to change. With a recent and much awaited budget approval, the IRS is undergoing a mass hiring initiative — potentially creating more capacity for agents to focus on examinations in addition achieving their goal of eliminating the agency’s back log of returns by the end of 2022.

And, as many can attest, there is nothing like a notice from the IRS saying you are being audited to strike fear into your heart. But with a little planning and insight, the process doesn’t have to be so scary. Below are a few tips to get you started on the right foot.

1. Understand How It Works

While you could be selected randomly for an audit, the IRS generally relies on a screening process. And that process is getting a technological upgrade, now using artificial intelligence (AI) to identify returns that have a higher likelihood of issues or “red flags.” Those higher risk returns are reviewed by an IRS representative who then decides if any warrant further review and, ultimately, which are audited.

2. Know the Trends

So which areas of your return are most under the microscope with the IRS? There are certain areas of tax that garner more attention and could trigger an audit. While these areas are moving targets each year, one of the hot button issues today surrounds cryptocurrency. With the addition of the question: ‘At any time during 2021, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?’ on this year’s returns, we are likely entering the next new wave of oversight. The important thing is to be honest. While answering yes may flag the IRS to double check the capital gain or loss areas of your return, answering no, if it isn’t true, could come back to haunt you — as taxpayers with undisclosed foreign bank accounts painfully learned around a dozen years ago.

Looking ahead to 2022 tax returns, be aware that the sales thresholds for using popular apps such as Venmo, PayPal and eBay are changing — from $20,000 per year to $600 per year — and will likely result in more reporting requirements on your next return.

>> Read “The Intersection of Cryptocurrencies and Individual Taxation – Part I” and “Part II”

3. Prepare Early

The most important work to prepare for an audit should be done long before one is on the horizon. Meet with your advisers during your annual planning time to better understand what areas are black and white, and what may be gray — pre-identifying potential areas of exposure and responses in case you are selected for an audit down the road. This extra step will not only help you make informed decisions, but it can mean the difference between being prepared for a future audit and trying to answer questions you may not have seen coming.

Whether you are a business or individual taxpayer, it’s important to take the most appropriate legal position that suits your risk tolerance. And even if it comes under review, going through the process with a trusted advocate can make all the difference.

Contact Mike Kolk at mkolk@cohencpa.com or a member of your service team to discuss this topic further.

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Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.