When being audited by the IRS...?

Question

If you own a business you obviously are going to write off a lot of things and you have to have your receipts right? Well how does the IRS check ALL your receipts? I mean you could have thousands, how do they check all of them and what steps do they take? You could ealisy have a lot of bogus receitps too, how could they tell?

Answer 1

They have enough experience to know what patterns to look for. They look at your type of business and would look at your backup for expenses and income. They would also look at bank activity and the owners lifestyle (obviously if the business is doing poorly, and the owner claims not to make much on personal tax return, but lives in a fancy house in an expensive neighborhood and drives a rolls royce the IRS will smell that something doesn't add up).

Answer 2

The IRS conducts lots of different kinds of audits. The one you are referring to that checks everything is called a Total Compliance Audit. These types of audits are done very rarely but they do take a long time because every item on the return has to be substancuated.

Usually you get picked for an audit by the IRS computer system. It uses a mathematical formula to score your return by comparing it against others in your business or profession to see if you are underreporting income or inflating expenses. Audits and exams are sometimes generated because a third party (bank, mutual fund, employer) has reported to IRS that they paid you but its not located on your return.

In the case of expenses they will want to see your work papers, receipts, and bank statements, and canceled checks. In the case of underreporting of income they will want to see you bank and brokerage statements where they will reconcile income to your return. They might also want to see receipts for living expenses such as rent or mortgage, utility and phone bills and reconcile them against your checking account to see if you are hiding cash. If for example they were checking your mileage records they would disallow the deduction if you used an excel spreadsheet but, would allow it if you brought them a spiral notebook that had start and stop mileage, total mileage, date and business purpose. They would also disallow if it was too neat with ink all the same color and the pages looked new; but if it was tattered, different colors of ink and pencil, had some coffee stains etc. they would probably allow it. When checking receipts they want to see the original receipt and the cancelled check, if either is missing they will probably disallow. It’s not hard to find out if someone is providing bogus receipts i.e. everything looks like it came out of your computer printer.

Audits should not be confused with and exam. An exam is usually handled by mail where they are questioning something like dependent exemptions where divorced parents are fighting over the children or you forgot to include some bank interest or stock dividends on your return.

Answer 3

They don't check all your receipts. Generally they are only auditing one year, sometimes two. They pick samples of things to look at, and they focus on areas that are abused alot, for example, travel and entertainment, vehicles, etc. They know where the bogus stuff normally is. They also can compare your expenses to other comparable industry standards and see if your numbers are in the ballpark.

Answer 4

Bogus receipts LOOK bogus .
They have seen thousands of Real receipts .

They can tell real $$$ from counterfeit ,
Pretty sure they can tell legit receipts from vendors .
Xerox copies of handwritten receipts or computer print outs would be a red flag .
Vendor originals have their own look .

Also , all they have to do is contact the owner of the property that you "Claim" to be paying rent to .
All they have to do is start calling a few of the vendors you claim to have made payments too .

Business is about $$$ transactions .
You claim to make payments . . .
They can cross reference to verify if they are in serious audit mode .

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Answer 5

They'll pick some at random, or in areas that are often cheated on. If you can produce all of those receipts or at least most of them, you'll probably be OK. And an experienced auditor is pretty good at recognizing bogus receipts.

Answer 6

All I can say is, don't mess with the IRS.

Many times, the audit is only aimed at one or two items. If you are prepared, can quickly show them what they want, show no signs of attempting to evade anything, you can quickly be on your way.
Don't have your stuff together, be hostile or evasive, it;s going to be a long afternoon.
These people are very skilled, be prepared, have your stuff in order, and you'll be fine.
A friend, a locksmith, gets audited every year. His wife worked for the IRS, but is retired. he STILL gets audited.

Answer 7

they bring an adding machine with 4 rolls of paper and 2 extra ribbons