Knock, knock. Who’s there? IRS!

Those three letters can be the scariest acronym that individuals and business owners ever want to hear. Whether it’s a letter or by phone call, when it does come the first reactions are usually fear and panic. And because of what the IRS represents, even the most accurate and honest taxpayers usually suffer those same anxieties. An actual knock on the door is reserved by the IRS and state agencies for collection matters.

Before you become too worried about it, you should know that your chances of actually getting that call are very slim. Overall there is less than a 1% chance of getting audited.  As your income increases, so does your chance of being audited. For individuals with incomes over $200,000, the risk goes to 3%, with incomes that top $1M, the risk goes to 11%.  On average for wealthier tax payers, for every 363,000 income tax returns filed, approximately 39,000 will be audited. So if you like to play the lottery, the odds are better here, but still not a great chance of winning.

It’s much the same with business returns, but size is determined by assets. If your business has less than $10M of assets, the chances of it getting audited are only .61%, but if you are a large business, such as a corporation with assets over $10M, the chance goes up to 16%. Working in the taxpayer’s favor is that the federal budget for conducting these types of audits continues to shrink, which is forcing the IRS to be more selective in who they audit in order to achieve the possibility of greater collections.

The most important thing any taxpayer can do if they do get notified for an audit is to call their CPA immediately. And this goes for any type of audit, whether federal, state, local, payroll, sales tax or any other type of tax audit. Once you say something to the IRS, it’s hard to take it back. In a recent collection matter, I had a client have a tax agent come knocking at the place of business demanding to speak to the owner for a completely previously unknown situation. They did call me before seeing him, I had them give him my contact information and send him away. From there we were able to manage the matter in a completely orderly fashion.

The IRS makes contact, what’s next?  First your CPA will get a Power of Attorney providing them with the right to represent you in the particular matter. From that point on, the IRS will work through your CPA with all their questions and procedures.  They will then review your returns carefully looking for possible risk areas. They’ll ask themselves, why was this return selected? Sometimes returns are selected solely on a statistical formula, so there may not be anything wrong with your return. The IRS will provide the CPA with a list of questions and a request for documents and support related to your return that they will examine. CPAs are very careful to review the information for red flags and to know the problems and the solutions before the IRS reviews any of it. They are also cautious about not giving the IRS anything they did not ask for to ensure they are not expanding the scope of their audit.

The IRS does have up to three years from the date you file your returns to audit each year’s return. So it is essential that you keep your tax records for a minimum of those three years. It is also important to call your CPA as soon as you are contacted. Ignoring the IRS does not help to make them go away, what it may get you is that knock on the door. When you call your CPA they will handle your audit from start to finish and ensure you the best possible result for your personal situation.

–Wayne L. Martin, CPA, Partner