There’s nothing worse than getting that dreaded notice from the IRS: Your client is being audited. While some companies claim they can help with audits, many only provide basic services showing what is on the tax return and how the tax preparer came to that conclusion. They don’t actually navigate the entire audit process.

While it used to be true that Schedule C filers were more likely to be audited than 1120S filers, the IRS has expanded its efforts. With significant hiring and an expanded focus on higher earners, individuals making over $400,000 (including those filing Form 1120S) are under much closer scrutiny. While we’re not suggesting your client is entirely safe from the IRS’s watchful eye, the goal is preparation, and we can help with that.

1. Using Round Numbers – If your numbers look too neat, it could raise suspicion. Try to avoid estimates.
2. Failure to Report Corporate Employee Salaries – Omitting employee wages could flag your return.
3. Excessive Meal and Entertainment Deductions – If the IRS thinks the expenses are personal, they’ll dig deeper.
4. High Home Office Deductions – The home office deduction can be a red flag if not properly substantiated.
5. Claiming 100% Business Use of Your Vehicle – This is often a tough one to justify unless it’s truly the case.
6. Claiming Business Losses for Several Consecutive Years – If losses continue year after year, it can raise an eyebrow.
7. Reporting Higher Income – Reporting unusually high income might trigger questions about the source.

If your client’s tax return raises any of the red flags mentioned above, it doesn’t automatically mean they’re heading straight into an audit. However, it does increase the likelihood of the IRS taking a closer look. It’s important to keep in mind that while some red flags might be out of your control, many can be mitigated with careful planning and record-keeping.

If any of these flags are triggered, an audit might follow, especially if the IRS sees inconsistencies or feels the need to dig deeper into your client’s financial activities. But rest assured, being proactive and thorough in your record-keeping can help minimize the stress of an audit and increase the chances of a smooth resolution.

At this point, it’s essential to be prepared for the audit process. Preparation is everything, and we’ll walk you through some pro tips that will help your client stay on track.

1. Prepare Your Records Thoroughly
   Every expense you claim needs to be backed by solid proof. Whether it’s mileage logs, 1099 forms for contractors, or receipts for rent and utilities. Documentation is key. If it’s not documented, it’s not deductible.
2. Stick to the Questions Asked
   Auditors are trained to ask questions and dig into the specifics. Don’t volunteer information unless it’s specifically requested. Of course, always tell the truth, but don’t offer additional details that could potentially complicate things.
3. Understand Your Rights
   Before diving into an audit, familiarize yourself with the Taxpayer Bill of Rights. If you’re unsure of something, consult a tax professional or attorney. It’s better to be informed ahead of time than to scramble during the audit.

The IRS will notify you whether the audit is being conducted through correspondence (by mail) or in person. Depending on the method, your next steps will vary:

• Correspondence Audits: You’ll be asked to send documentation via mail. You may also be invited to participate in digital options, such as Secure Messaging and the Document Upload Tool (DUT).
• In-Person Audits: This is more intense. You’ll meet with the IRS at their office with all your documentation in hand. It’s a face-to-face review, often involving a detailed interview. You can attend the meeting on your own or with your client, but make sure you have copies of everything you submit. It’s critical that your client doesn’t say anything that could lead to future tax liabilities.

The IRS generally audits returns from the most recent three years or the last three filed tax periods. However, if there’s suspicion of fraud, they can go back and audit every single return you’ve filed. Stay proactive and organized to avoid a situation where years of tax returns are under review.

If the IRS proposes additional taxes or credits due, you have multiple opportunities to challenge their decision:

• Appeal Process: You can appeal the audit results within a specific period. If you miss this window, your only option becomes Audit Reconsideration.
• Audit Reconsideration: If you didn’t respond to the original audit, moved and missed correspondence, or have new evidence to present, you can request reconsideration. But be aware: this is only an option if you missed the initial appeal deadline.

Tip: For more details, check out Publication 3598: What You Should Know About the Audit Reconsideration Process.

If your client requires further assistance beyond what you can offer, you might want to recommend a Low Income Taxpayer Clinic (LITC). These clinics provide representation at little or no cost to eligible taxpayers, typically when the dispute is under $50,000. Visit Publication 4134: Low Income Taxpayer Clinic List or contact the IRS at 800-829-3676 to find a nearby clinic. Alternatively, for clients with more complex cases, it may be necessary to seek private counsel from a tax attorney.

At Community Tax, we’re committed to being more than just a service provider, we’re your trusted partner in navigating the complexities of tax issues, including audits. Our team offers valuable insights, expert advice, and clear, actionable steps to ensure that both you and your clients are well-prepared.