Preparing for an IRS Audit– April 18, 2017 by Mike Kolk

As we mark this April 18th tax deadline, for many people filing a return is not always the end of the story. While there’s been much talk of budget cuts and staff shortages at the IRS, there is always the chance your number will get called. And there’s 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. Here 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. The IRS runs tax returns through a scoring system; returns with high scores are flagged for follow up by a classifier. The classifier then reviews each return and decides which ones will be audited. 
  2. Know the trends. There are certain areas of tax that garner more attention by the IRS and could trigger an audit of your return. As one of the more flexible and least-codified areas of tax law, in recent years the IRS has considered partnerships and LLCs an area of potential abuse — and therefore a prime target. And changes to partnership audit rules beginning in 2018 represent an even bigger opportunity for partnerships to be selected for an audit. (See our spring issue of Taxonomics
  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 advisors 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. 
 
Cohen & Company is not rendering legal, accounting or other professional advice. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts and circumstances.