IRS Audit Knockout-Round 2 of Audit Questions
What questions does the IRS ask during an audit? This list expands on some additional audit questions covered earlier.
Today’s “Round 2” of questions relates specifically to:
- Critical information about your household, and
- Important details about how your tax return was prepared.
We will also analyze and explain why these questions are asked.
Question # 1 – Name and Explanation of Dependents
This question is relatively easy.
Parents usually claim their live-at-home children as dependents. Beyond that, it can get complicated. Often, other relatives and individuals are also sometimes considered dependents.
For example, say you claim a parent or another relative. During the IRS exam, the auditor will want you to explain why you claimed this person. The IRS is verifying whether this person should be claimed as a dependent. In addition, the IRS wants you to justify whether you are entitled to certain tax credits.
Another thing: There is an increasing amount of enforcement regarding tax return preparers behaving badly. Because of a few unlawful preparers, the government is collecting statistics to determine whether there are similar illegal patterns used by your tax accountant.
In addition, information about your dependents is sent to IRS’s Collections Division after the audit is completed. This is done so IRS can determine (or confirm) your ability to pay.
Question # 2 – Describe the Support Arrangement for Your Dependents
The auditor will ask you to describe different support arrangements for each of your dependents. One example is the arrangement of children of divorced parents. (Weird tax things happen during a divorce.) The IRS is using this information to determine whether a person you claimed was truly financially dependent on you.
The IRS also seeks to determine if the financial support you provide is quantifiable. Can the support be verified? Does the support disqualify the dependents for the tax exemption or tax credits? Would the IRS actually consider the support to be additional income?
Never forget, every IRS audit question carries another purpose: analytic or procedural.
Question # 3 – Who Lives in Your Home?
You may think you have already answered that question. But you only talked about dependents.
This question specifically refers to any other people living in your home.
Here, the IRS looks at whether there are multiple people claiming tax benefits that should be only available to one person. IRS will also ask whether that person lived in the home for the entire year. Sometimes, a dependent’s part-year residency changes the outcome of an audit.
The IRS will then provide this information to your state government. The purpose of this is so the state can check the residency status of that person. The state government will look to see if that person claimed residency in more than one state.
Question # 4 – Who Prepared Your Tax Return?
This question was briefly discussed in a previous article. Today we are doing a deeper analysis of the question.
Who prepared your tax return? What documents were provided to your tax return preparer?
- The auditor is seeking to determine whether your tax return preparer still has the documents you provided. The auditor will start to make a list of what information the IRS can rely on.
In the IRS’s perfect world, every single item on your tax return should be verified by an “independent third party” document. However, in the real world of small business owners, this 100% perfect documentation rarely happens. Plus, the audit was likely “triggered” by something. But there is a process for audit success.
- The IRS is also considering what person is at fault for any mistakes on the return. Now, why does that matter?
Fault matters because there are penalties involved. The amount of the penalty will depend on the type of error as well as the mindset of the person making the error. If the error was intentional, you might be looking at a penalty for fraud.
See this related VIDEO: How to Win Every IRS Audit – Tips From a Tax Attorney.
Again, there are procedural and analytic reasons for EVERY question the auditor asks.
See next week’s blog when we review more IRS audit questions.
If you are being audited and think you need professional help – Contact Tax Law Offices today!