What Records Do I Need to Have if I am Audited?

When you receive a written notice from the IRS regarding an audit the first thing to do is, not panic. Proper tax planning helps individuals avoid audits by taking all the necessary precautions to avoid them, but sometimes they are still requested.  The most important thing to remember is that an audit does not always mean there are severe consequences.

All it means is the IRS is requesting to examine your tax return in more detail to make sure the income and deductions claimed are accurate. Often, the tax records are only due to a minor flaw, if any, and the IRS is only seeking more information to make sure nothing is out of the ordinary.

Types of Tax Audit

You will receive a written notice by mail if the IRS is requesting an audit. Tax planning can help you prepare for the three main types of audits.

• Mail audits: When receiving a mail audit, there is no requirement to meet with an auditor in-person. Instead, the IRS wants additional documentation to verify claims. The mail audit is by far the most common type of audit the IRS conducts, and often falls in the taxpayer’s favor. For example, it is sometimes as basic as requesting proof of donations claimed or income discrepancies.
• Office audits: The office audit is more in-depth than a mail audit as you are required to meet with an auditor in-person. Along with requesting more documentation, the auditor will likely ask you questions regarding the claims. You have the right to bring a personal accountant or lawyer, if you deem it necessary.
• Field audits: The most extensive of the three types of audits, field audits require the IRS agent to conduct the examination at your home or place of business, as opposed to meeting the IRS agent at his or her office. Field audits are more detailed and thorough, meaning the IRS likely suspects some type of fraud or misconduct.

Tax Planning with Personal or Business Records

The best way to avoid an audit is to exercise careful and detailed tax planning. It can help you avoid the audit altogether, but sometimes it is unavoidable regardless of your preparation.

The records you need to have for an audit depend on if the matter is regarding personal income or business income. Small businesses will need more documentation than a personal audit.

Regardless, the general rule is individuals should keep records of income, expenses, donations, etc. for at least three years, with some suggesting more like six to seven years. The three-year rule is mandatory for tax planning in the event of an audit because the IRS is entitled by the Period of Limitations (generally three years in most states) to request old tax records and documentation, and can penalize up to six years after taxes are neglected or not filed.

Common Types of Records for an Audit

In the written notice given by the IRS, they will generally notify you on, not only what type of audit is being conducted, but also what documentation is requested. General records that are requested include:

• Personal or business bank statements
• Sales records (for a business)
• Purchase records, or business expenses
• POS records (for a business)
• Receipts regarding donations that were claimed
• Insurance records
• Legal documents (such as verifying business licensing, etc.)

How to get Favorable Results in an Audit

No one wants to get audited but it does happen. Tax planning can help you avoid any negative outcomes, so it is important not to assume the worst when a written notice is received. Sometimes it is nothing more than the IRS doing their job and needing more information to verify tax records.

By providing correct documentation you can avoid an audit or receive an IRS explanation post-audit that is satisfied with your documentation and/or explanations. In a worst case scenario, having the correct records can help in the court of law if you need to request further review of an audit or appeal the IRS decision.

The best advice regardless of filing for individual personal income, joint income, or business income is to save everything. The best tax planning is when all forms of documentation are saved with a physical copy, and ideally backed up with a digital copy as well. Saving every form of income, sales transaction, business expense, and/or donation can verify everything that you claim on a personal or business tax return.

Do you have questions about the records you need after receiving a written request for an audit by the IRS? Contact Levy & Associates for more information by visiting our website.