IRS Audits: Common Questions [1/2 VIDEO]
At Milikowsky Tax Law, we frequently encounter questions from clients about the intricacies of IRS audits. It’s essential to understand the process and the expectations to navigate these situations effectively. Below, John Milikowsky, founder of Milikowsky Tax Law, offers expert advice on common queries regarding IRS audits.
1. The Necessity of Providing Bank Statements to the IRS
When faced with an IRS audit, whether for an individual or a company, it’s imperative to provide all requested documentation, including bank statements. If the IRS audits your company and you are a significant shareholder, there is a high likelihood that your personal tax returns will also be scrutinized. This is particularly true for flow-through entities like S-Corporations or LLCs, where adjustments have direct implications on personal tax assessments.
2. The Process If Bank Statements Are Not Provided
If required bank statements are not initially provided, the IRS has the authority to retrieve these documents directly from your bank without a court order, usually within 30 to 45 days. However, obtaining and analyzing these statements personally beforehand—through what is termed a bank deposit analysis—allows you to identify and clarify any non-taxable income or discrepancies before the IRS does. This proactive step can help streamline the audit process and address potential issues early.
3. Handling Non-Taxable Deposits
During a bank deposit analysis, it’s crucial to differentiate taxable from non-taxable deposits. Non-taxable deposits could include account transfers and loan proceeds, which should not be confused with taxable income. Having clear records and evidence of these transactions is vital when presenting information to the IRS to avoid unnecessary assessments.
4. The Importance of Transactional Documents in the Case of Net Operating Losses
Clients often inquire about the necessity of providing detailed transactional records, especially when dealing with net operating losses from previous years that are carried forward. The IRS requires substantial documentation to validate these losses, which often means a thorough review of past bank statements, invoices, and checks, effectively conducting a mini-audit of previous years.
5. Preparing for an IRS Audit
Understanding what triggers an IRS audit can significantly aid in preparation. Common triggers include large or unexplained deductions, high volumes of non-wage transactions, and significant changes in income without corresponding changes in lifestyle. Being prepared with all necessary documentation, understanding your rights, and knowing what to expect can reduce the stress and potential repercussions of an audit.
Navigating an IRS audit requires careful planning and detailed record-keeping. At Milikowsky Tax Law, we strive to empower our clients with the knowledge and tools necessary to manage these processes efficiently and effectively. Should you find yourself facing an IRS audit, remember that professional guidance can provide invaluable support and clarity throughout the process.
