Key Takeaways
- For example if you’re running a captive insurance company, they may not be concerned about your ordinary and necessary business expenses, they’re going to go after the captive insurance company.
- So IRS audits tend to be generally pretty thorough because what happens is the auditor is operating off a checklist and so the auditor wants to make sure that when they’re doing an examination, the…
- If it doesn’t come out okay, then the auditor’s going to dig down and so what we refer to when an auditor digs down is sometimes they engage on a fishing expedition which is where they’ll throw a w…
Well it depends so as I’ve explained previously the IRS has very limited resources and they’re not there to waste time; however once the IRS has you under examination, it’s not like they’re just gonna look at one particular issue and then go away unless you have a super technical legal issue that is the reason that you got audited. For example if you’re running a captive insurance company, they may not be concerned about your ordinary and necessary business expenses, they’re going to go after the captive insurance company. So IRS audits tend to be generally pretty thorough because what happens is the auditor is operating off a checklist and so the auditor wants to make sure that when they’re doing an examination, they’re actually examining it. Generally what happens is the auditor will spot a couple of different categories, they’ll look at a couple of expense categories, they’ll look at a couple of income categories, they’ll do a bank reconciliation, something like that and then if that comes out okay, then the auditor is not going to dig any deeper. If it doesn’t come out okay, then the auditor’s going to dig down and so what we refer to when an auditor digs down is sometimes they engage on a fishing expedition which is where they’ll throw a whole bunch of things out there and see what sticks. But then the other thing that they can do is that if they find an error they’ll, start digging into everything and they’ll use the inaccuracy in one category to open up all the other categories on the return and go digging through. So you want to try to avoid that situation if you can but just understand that particularly if you’ve been assigned to a field agent and that person is either coming out to your house or coming out to your business, that person’s going to do their job and they’re going to be pretty thorough with their examination.
Dealing with an IRS Audit?
Every audit has a scope — and what you produce in response sets the direction of the examination. Whether you’re just opening an audit notice or already in correspondence, a brief review can clarify where you are and what your options are.
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