How does proper recordkeeping affect my audit results?
For incomes up to $200,000 your audit risk is 1%. From $200,000 to $1 million, it jumps up to 4%, and over $1 million the audit rate is around 12%.
For those taxpayers in the 1% audit risk bracket, 77% of the audits performed are done by mail. This means the IRS sends you a letter asking for documentation. Hot topics right now include education expenses, charitable contributions and medical expenses.
Here are some things to keep in mind when responding to an audit:
Be Prompt: While the IRS gives you generally 30 days to respond to initial notices, if you wait to the very last minute to send in your documentation there is a good chance that correspondence will get crossed in the mail. Make this is a priority.
Send 100%: When you mail or fax information to the IRS, ensure that you have completely responded to the entire letter or notice. Do not send some information today while you gather up other information later. If you send two partial responses to the IRS, the chances of the same processor getting both pieces of your tax puzzle are very low. Request an extension for your response. Be patient, yet punctual, and send everything required at once. Fax or mail, pick one. If mailing documents, use a certified mail service.
Send Copies: Never ever send originals. The IRS might lose your documentation, and they certainly won’t mail it back.
Don’t Overshare: Only send what is asked for. Don’t overshare with the IRS but at the same time don’t send a riddle. If you make the processing agent’s job a little bit easier, they might make your life a little bit easier. When they ask for your favorite color, don’t respond with pizza.
Fax: When you fax your information, write your name, social security number and tax year on the bottom of each page.
Interestingly the IRS has the burden of proving certain facts in court if you kept adequate records to show your tax liability, cooperated with the IRS and met certain other conditions. Having said that, many Tax Court summaries and opinions start with the words “As we have observed in countless opinions, deductions are a matter of legislative grace, and the taxpayer bears the burden of proof to establish entitlement to any claimed deduction.” Sounds like the Tax Court is really on your side, wink wink.
We can’t be completely sarcastic- Rule 142(a)(1) Section 7491 shifts the burden of proof to the IRS with respect to a given factual issue where a taxpayer-
1. introduces credible evidence with respect to that issue
2. meets all applicable substantiation requirements
3. complies with all record-keeping requirements
4. cooperates with any reasonable requests for information
You can learn more about audits at wcginc.com/Audits.pdf.