Are you wondering what documents are needed for an IRS audit? Is the thought of preparing for an IRS audit making your stomach turn? Realize that you are not alone in this feeling.
According to the Internal Revenue Service (IRS), in recent years, nearly one million Americans were audited, resulting in nearly 17.3 billion dollars in additional tax revenue. This includes all types of taxpayers (individual, businesses, and non-profit).
A computer system called the Discriminant Information Function (DIF) is used by the IRS to scan every tax return. It detects anomalies in tax returns and helps the IRS determine who will be audited each year. Human detectors are also used to cross-check this information.
The IRS determines if you need to go through the audit process by using the DIF computer system, random selection, or related tax examinations. Related tax examinations can occur if you are in business with someone who was or is being audited; however, this is not always the case.
Many taxpayers cringe at the words “tax audit,” but in reality, the majority of taxpayers don’t receive IRS tax audits. However, it’s better to be safe than sorry. Do proper planning and get expert advice, so you can know what is involved in an IRS audit and how to be ready if one comes your way.
In this article, we’ll look at what documents you should have in the event of an audit. It’s better to be prepared than to have to create documents from scratch because you didn’t hold on to them when you had them.
What Documents are Needed for an IRS Audit
In general, you should keep all personal tax returns along with anything that backs up what you have reported on your tax returns. So, anything you used as supporting documentation to claim credits, deductions, or other line items on your tax return that you should hold on to.
Check out our record retention guide for more information on what IRS documents you need and how long to keep them. You don’t want to be in a situation where you are being audited by the IRS and have no receipts or other crucial audit documentation.
We will go over the top eleven documents you will most likely need if you are audited and why you should keep them handy. Reduce your chance of being audited by holding on to important documents. Remember to never mail the IRS original documents; they suggest sending in copies of your original records instead.
Receipts
Keep receipts, organized by date with notes on them, explaining what they were for and how they relate to your tax return. Make sure they show what you paid for, the dollar amount, and the date of service or purchase. These can come very handy when calculating your home office deduction on your self-employment tax return.
Bills
As you organize your bills for the IRS, make sure each one reflects the name of the individual or company, the type of service the bill was for, and the date of purchase.
Canceled Checks
The IRS does request that you match these up with the bills they paid for and any employee reimbursement that was related to the expense.
Legal Papers
You will want to make sure these papers are well-organized and relevant to your credits or deductions taken on your tax return. Some examples of legal papers the IRS may request include divorce settlements, including custody agreements, and property acquisition records.
Loan Agreements
With loan agreements, you will want to give the IRS copies of your original loan documents with all of the details that you have available, anything explaining what the loan agreement was all about. For example, you’ll want to include the bank name where you got the loan, the names of the borrowers, and the interest rate used for the loan.
Logs or Diaries
Logs or diaries can be especially helpful when claiming certain activities like job hunting, gambling, and business expenses, such as those used on Schedule C. To show you legitimately claimed these expenses on your annual tax return, be sure to hold on to these records.
One example of something you may wish to have available is mileage logs and records as they pertain to business expenses like that.
Tickets
Make sure you label your tickets used when traveling with the purpose of the business trip, grouping like items together. For example, if several tickets were used for the same business trip, you should group them together. The IRS also wants you to keep lottery tickets, as they serve as proof of profit or loss when gambling.
Medical and Dental Records
You may need medical and dental records if they pertain to specific items on your tax return. Keep copies of information regarding your medical savings account, physician bills or statements, and any capital improvement records with medical information. For more information on this item, check out the IRS’s page for Medical and Dental Expenses that May Impact Your Taxes.
Theft or Loss Records
The theft or loss records you may need for the IRS include insurance records, photos or videos documenting the extent of the damage done, and other explanations of the loss to prove your case. Sometimes, the best option can be to work with a tax professional who knows audit and tax preparation front and back.
Employment Records
Hold on to uniform policies and dress codes. Of course, if there were any education expenses or related documents for your employees, keep those as well. Always save your W-2 statements, too.
Schedule K-1
Schedule K-1 is for the shareholder’s share of income, deductions, credits, inc. If this applies to you, be sure to hold on to these records, as well.
More Information about IRS Documents
For more information on the documents you need to have ready for an IRS audit, check out the IRS’s page called IRS Audits: Records We Might Request, or visit with Borshoff Consulting today for clarification and details on this information.
Additional Information to Prepare You for an IRS Tax Audit
You now know what documents are needed for an IRS audit, so it’s time to address a few other things you should be aware of when it comes to tax audits. The more knowledgeable you are about this subject, the less at ease you will feel if you are one of the unlucky few who does get a tax audit after tax season.
It’s a good idea to understand what IRS audit triggers are and what they mean for you. For example, mathematical mistakes can prove to be problematic when it comes to your annual tax return. While this is an easy fix, you still may have to deal with the IRS. Have a proper tax consultant help you when preparing your tax return to help lessen the chance of mistakes.
There are many IRS tax audit myths that you need not worry about. For example, the IRS doesn’t throw people in jail because of tax return errors. Also, as eager as you are to put tax season behind you, the IRS may not notify you of a tax audit until much later in the year (or following years)!
Make sure you have the right facts and know what your taxpayer rights are, so you are not caught off guard by anything. The best thing you can do is learn everything you can about tax audits; check out our complete guide to surviving a tax audit, or hire a qualified tax professional who can help you every step of the way.
Conclusion
You don’t need to understand every detail about the auditing procedure to be well prepared for a tax audit. Just have the right work papers, and financial reporting backup documentation suggested in this article. Most importantly, hold on to those annual tax returns! You will need to know your taxable income for each year, for example.
The smartest thing you can do if you are concerned about an upcoming audit with an IRS agent is to have your own representation. Have a trusted advisor on your side – one who is professional, responsive, and experienced with IRS field audits. Hire a tax accountant to help you complete your income tax return each year.
But, be sure to use someone who will deliver the highest quality of work on your behalf. At Borshoff Consulting, we can represent you in an audit; just schedule a free tax consultation with us, so we can help you get started. Learn more about tax consultations today, so you can determine how we can best help you and your particular situation.
You want a tax professional who knows the tax laws, audit programs, and auditing standards the IRS uses in audits with individuals or small businesses. We do it all, including business consultations!
Reach out today to learn more! Our professional judgment can greatly help you! Plus, you can trust Indiana’s tax expert!
