Typically, the IRS can comb back through three years of your taxes and issue an audit. This is a rolling three years, so they can reach back three years from any given time. If the IRS finds substantial errors in those three years, they’ll reach back another three years (six years total) to see if they can find any other errors. The IRS usually doesn’t look back more than six years.
Once the IRS identifies the errors and necessary adjustments, they’ll send you a Notice of Audit and Examination Scheduled. On this notice, they’ll list why they are conducting the audit, what items they need clarification on, and which documents will clear your audit.
While this is “phase one” of an audit, the IRS can take things further if you do not comply.
How Long Does it Take to Start an Audit?
The IRS usually starts their audit within a year of your last official tax season. This means you could get a letter months after your last filing.
This does not mean that you’re out of the woods if you file for a few years without an audit.
The IRS will audit accounts at random, or they choose accounts with increased frequency the higher the gross revenue becomes.
This means for owners and executives your company and your adjusted gross income matter to the IRS. They will keep a closer eye on you than anyone else generating less revenue through business channels or taking home less in income.
How to Avoid an IRS Audit
There’s no surefire way to avoid an audit, but you can lower as many red flags as possible (and raise as many green flags). Here’s how:
#1. Make Zero Math Errors
The IRS will not accept “oops” as an excuse for reducing tax obligation or paying in less than legally required. Errors are not considered accidents by the IRS. Errors are considered intentional. This means your accounting department must be spot-on and accurate.
#2. Report All Money Required By Law
The IRS tax code is written to incentivize specific behaviors from businesses, companies, individuals, charities, and more.
This is why an outsourced accounting department is so beneficial for you. You can reduce your tax obligation, legally and ethically, without the fear the IRS will come knocking at your door for a filing you made years prior.
#3. Claim Reasonable Charitable Donations
“Reasonable” is an undefined term, but it’s the standard in a handful of tax codes. Make “reasonable” charitable donations as to not trigger an audit because you donated too much to a given cause.
Yes, this sounds absolutely ridiculous to limit your charitable giving, but the IRS does not take excessive charitable giving lightly. They see it as a sign of potential fraud.
#4. Deduct Reasonable Amount of Expenses
As an owner or executive, you are within your legal right to deduct business or company expenses, but if you get excessive, it’s a red flag to the IRS.
What is “excessive expense deduction?” Again, this is like the “reasonable” term mentioned above. It takes an experienced outsourced accounting department to give you an accurate idea of where the threshold is before the IRS starts getting curious.
How to Outsource Your Accounting Department
If you want to outsource your accounting department, then let me manage your financial standings, reports, and forecasting for a third of the cost.
I deliver spot-on, accurate reports weekly, monthly, quarterly, or whenever you like.
I reconcile and bring books current – the first time, so you can work on growing your company instead of struggling inside of it.
I forecast your financial future so you can grow your company toward financial success.
