Being selected for an audit doesn’t mean that you’re suspected of incorrectly reporting your taxes for your dental practice.

There’s no getting around it: The prospect of being audited by the IRS is unnerving, but the agency chooses to audit individuals and businesses for a number of reasons, including:

• Mismatched documents. If numbers from forms like W-2s and 1099s don’t match what was reported, a taxpayer may be targeted.
• Proximity. When someone has a business relationship with someone else who’s being audited, like a partner or investor, an audit may be ordered because of shared issues and/or transactions.
• No reason at all. Some are selected for audits simply because a statistical formula was applied and they came up.

What is an IRS audit?

The goal of an IRS audit is to determine whether the taxpayer has paid the correct amount of money in taxes. This is done by examining the taxpayer’s accounts and financial information.

How will I be contacted?

You’ll receive a phone call and/or a letter. The initial contact is never made via email.

Where will the audit be held?

There are many options. An audit may occur at an IRS office, or it may be at your home, your place of business, or at an accountant’s office. It may also be done through the U.S. Mail.

How long will it take?

There are many factors that have impact on the length of an audit, including complexity of the issues and availability of both the necessary records and the involved parties. An audit will of course take longer if the IRS and the taxpayer(s) have difficulty agreeing on the results.

How long after I’ve filed a return can the IRS still order an audit?

Audits are usually conducted within three years from the date a specific tax return was filed, so you should keep supporting documentation for at least that long. You should keep payroll records for a minimum of four years. In some cases, a longer period of safekeeping is needed. We can help you determine what should be stored and for how long.

What are my rights as an audited taxpayer?

There are many. The IRS has a publication called Your Rights as a Taxpayer. These include the right to:

• Courteous, professional treatment by IRS representatives.
• Confidentiality and privacy.
• Representation, either by you or by an authorized representative.

How is the outcome of an audit determined?

An IRS audit can conclude in one of three ways. There can be no change, which means that you have provided information that the IRS accepts as valid, and the return does not have to be modified. In an audit that is agreed, the IRS has recommended changes based on the information provided. You understand them and agree with them. An audit can also be disagreed. The IRS has proposed changes, but you don’t agree with them. In a case like this, the IRS may call in a manager to review the findings. You also have the right to file an appeal.

Is there any way to avoid being audited?

Since some audits are selected randomly, there’s always a chance that you’ll be audited. However, there are red flags in tax returns that sometimes prompt the IRS to order an audit. We can tell you what these are, and we’ll prepare your return accurately and thoroughly to minimize your chances of being singled out.

The fifth article in our series about IRS audit red flags focuses on claims about businesses losing money. It’s one thing to have an occasional loss, especially during economic downturns when businesses everywhere are losing money. Rest assured, however, that the IRS knows the current trends of businesses and industries on a local and national level. If something smells rotten in the state of Denmark, or Small Town, USA, they are sure to do enough digging to get to the bottom of the story.

If your dental practice fails to turn a profit for three of the past five years, IRS professionals are going to want more than a little evidence of efforts to turn a profit. It’s a huge red flag to wave and a serious indication that perhaps there are ulterior motives for owning and operating your practice.

And watch out if you claim a business that is really a hobby. The IRS isn’t keen on the idea of taxpayers writing off expenses for their hobby that they label as a “business.”

A start-up business may not make a profit in Year One or perhaps even in Year Two, but when no profit is made in the third year or succeeding years, the IRS will begin to think that this “business” is really a hobby because it is not making money. The IRS offers more insight into the determination of a business or hobby here.

Other things that get extra scrutiny from the IRS for small businesses include putting relatives on the payroll, over-estimating business expenses and using a company car for personal reasons.

In the event that this red flag triggers an audit for you, be sure to keep meticulous financial records. In addition, do other things, such as having business cards and a business license, to demonstrate that you own and operate a real business.

Avoiding these red flags is not always possible, but you can minimize them by giving the IRS fewer flags flying and making your business a less attractive target for their further inspection.