For Michigan individuals and businesses, an audit is an intimidating process that most of us would prefer to avoid. The purpose of the IRS in conducting audits is to "ensure information is being reported correctly, according to the tax laws, to verify the amount of tax reported is substantially correct."
The IRS has significant investigatory and enforcement capabilities when it comes to audits. The IRS can make significant demands that you supply documentation -- often within an extremely tight deadline. For example, the failure to supply documentation backing up a deduction could trigger IRS action. The agency also has the authority to levy significant penalties should there be a finding of wrongdoing.
Even when making every effort to comply with state and federal tax rules, you may find yourself in the cross fires of the IRS. However, there are a number of steps one can take to reduce the likelihood of an audit occurring:
- Always be honest in the reporting of income
- Provide the IRS with all requested documentation and information
- Avoid making claims for deductions that will raise red flags with the IRS
- Be careful about filing optional forms or schedules may appear questionable and that trigger audits
- Do not claim charitable contributions higher than your income would ordinarily allow
- Consider incorporating your business by electing S corporation status rather than remain a Schedule C filer (Schedule C filers face audits at a much higher rate)
- File state returns with the same attention to detail as you file your federal returns
- Choose your tax preparer with care
Please keep in mind that an audit notice does not mean that you are guilty of violating any tax laws. Still, having experienced tax counsel on your side to advise you on ways to avoid a tax audit can make your life easier. And even in the event an audit does arise, it is good to have an attorney present who regularly represents clients during this process and knows what defenses to raise.