If you’ve received an IRS audit letter, it’s important to be prepared for the interview that follows. During this interview, the IRS will likely ask you a series of questions to better understand your financial situation and the accuracy of your tax return. It’s crucial to respond truthfully and accurately. If you’re unsure about any aspect, consider seeking advice from a tax attorney before proceeding.
1. Sources of Income
The IRS will inquire about the sources of your income and whether you accurately reported them on your tax return. This involves examining cash transactions, unreported gambling winnings, inheritance, and other forms of additional wealth. While not all of these sources are taxable, the IRS will analyze your bank account to ensure your reported income matches their findings.
2. Cryptocurrency and Digital Currency Accounts
Cryptocurrency and digital currency accounts have garnered significant attention from the IRS. Reporting requirements now necessitate disclosing digital currency transactions on your tax return. If you possess a decentralized wallet, the IRS will be particularly interested in your record-keeping methods and how you determine taxable gains from these transactions.
3. Usage of COVID-19 Relief Funds
For business owners who received SBA PPP or EIDL loans during the pandemic, the IRS will want to know how these funds were utilized. This is a critical aspect of their assessment, as the IRS is increasingly scrutinizing the spending of these relief funds.
4. Foreign Bank Accounts
If you hold foreign bank accounts, it’s crucial to ensure you’ve reported them accurately on your Schedule B and filed the FinCEN 114 if your aggregate holdings exceed $10,000. Non-compliance in this area can trigger further scrutiny and possibly a referral to a criminal investigation.
5. Record-Keeping and Professional Assistance
The IRS will also focus on the accuracy of your record-keeping. If you have a business, they’ll inquire about the presence of a CPA or bookkeeper. The frequency of bank account reconciliations, the accuracy of your financial statements, and how well you track transactions will all come under scrutiny. Errors in your record-keeping could lead the IRS to question other aspects of your tax return.
It’s important to note that while these are key areas the IRS will explore during an audit interview, they may delve into other aspects as well. The initial audit letter serves as a starting point, but the examination may extend beyond the identified issues.
Remember, honesty and accuracy are paramount in your interactions with the IRS. If you find yourself uncertain about any of these areas, consulting a tax attorney can provide you with the guidance needed to navigate the audit process effectively.
I’m John Milikowsky, Founder of Milikowsky Tax Law. I hope this information has been useful in helping you prepare for an IRS audit interview.