Tax errors and audit concerns: Tips for business owners and individuals

These three mistakes can give the IRS even more time to conduct an audit.

Filing taxes with the Internal Revenue Service (IRS) is a frustrating process, but getting a notice or letter from the IRS for an audit is an even more aggravating prospect. In most cases, tax payers can receive a notice for an audit up to three years after the taxes were filed. In some instances, the amount of time the IRS has to conduct an audit can be increased.

Examples that can put a tax payer at risk for a longer audit period include issues with:

  • Income. A failure to disclose over 25 percent of your income can give the IRS cause to double the time period allowed for an audit. This generally translates to an extension from a three year audit period to six years. The issue is so prevalent that a recent article in Forbes discussed it, noting the IRS refers to these situations as substantial understatements of income. The article also notes that the normal applicable audit period is also doubled in instances when the IRS claims more than $5,000 of foreign income was not reported. The IRS defines foreign interests broadly, including savings and brokerage accounts as well as any business interests.
  • Failure to file. A failure to file taxes indefinitely extends the audit period.
  • Signature. The IRS also considers a tax return invalid if it was not signed. This translates to an indefinite audit extension, a period referred to by financial experts with Forbes as the "audit purgatory." This loophole may be applied even if a taxpayer failed to sign only one of the forms.

In addition, certain situations can increase a taxpayer's risk of an audit in the first place. Common examples include a significant decrease in reported income, a missing W-2, a status of self-employed and a large amount of charitable donations.

Tax audit defense

Individuals and businesses are carefully scrutinized by the IRS during an audit. In fact, small business owners should be aware of the fact that if their business is audited, their personal taxes are likely being reviewed as well. During an audit, the IRS agent is likely reviewing your lifestyle to ensure it matches with your reported income as well as carefully analyzing all reported expenses.

Whether you just received notice of an impending IRS audit or recently received the findings of an IRS's audit and are looking to move forward with an appeal, it is wise to contact an experienced IRS audits and appeals attorney. This legal professional will guide you through the process, advocating for your rights and working to better ensure a more favorable outcome.

Keywords: Tax errors, business, Internal Revenue Service, Tax audit