In this video, I will walk through what is an IRS audit, what happens during an IRS audit and ways to avoid an IRS audit.

Recently, the IRS was funded $80 billion to be used for software updates and hire additional people to improve the customer service phone lines as well as more agents in the field.

As the IRS continues to hire more agents, they plan on increasing their audits of individuals and companies.

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If you or your company gets selected for an IRS audit, it can either be in person (face to face) or through mail (correspondence examination). If the audit is in person, then they will work with you to schedule a time to visit your office or at the IRS office and send you a list of items they will need prior to the audit. More audits are being done via mail where the IRS will send you a reason for the audit and ask that you make copies of certain documents and mail back to them.

The IRS will typically go back three years to perform an audit. However, if they find a substantial error, they could go back up to six years.

Here are some areas that cause IRS audits - red flags:

1. Not reporting income that you earned. This could be W2 income, 1099s that you received and never reported on your tax return. It could be interest or dividend income or investment sales you made during the year and not reporting that income. What if you own a rental property and received rental income, but never reported it? In most cases, the IRS already knows about what you’ve earned as they have received forms: W2, 1099-DIV (dividend income), 1099-INT (interest income), 1099-R, 1099-NEC, 1099-S (sale of a home), 1099-B (sale of investments), and K1s - income from partnerships or S-Corps.
2. Big swings in income from year over year could suggest that prior or current year income is being underreported. Your CPA will be able to add a comment or note within your tax return to explain to the IRS why there were such large swings from one year to the next.
3. Excessive Deductions and Credits. The IRS will compare what you’ve taken in years past with the current year to see if something might stand out. They will also compare deductions and credits from your return to other taxpayers in the same tax bracket again, if you had something unusual during the year, its better to explain in a footnote or attach support like a larger charitable donation letter to your tax returns.
4. Questionable deductions - home office deductions, and passive losses on rental properties tend to be areas where the IRS will focus their time.
5. Cash transactions - if you engage in cash transactions, beware that your bank reports amounts over a certain amount to the IRS. Bank Secrecy Act - transactions greater than $10,000 will get reported to the IRS.
6. Schedule C - sole proprietors - these forms get audited a lot more by the IRS than any other entity structure. Within the Scheudle C, if you’re reporting Meals, Travel - make sure you are keeping your receipts to support these business expenses. You should consider setting up an LLC/Partnership or S-Corp vs. using a Schedule C.
7. A business that operates losses for several years in a row. The IRS could argue that you’re operating a hobby vs. a trade or business.
8. Avoid round numbers - use actual numbers. Make sure you have good bookkeeping and accounting. Using Quickbooks Online.
9. S-Corp owners - make sure you 1. pay yourself a salary and 2. make sure the salary is reasonable based on the size of your business. You should use [Gusto.com]([ Ссылка ]) for payroll. They will manage the taxes payments and filings. You don’t want to miss any of these filings.
10. File your taxes on time - even file an extension.

About my channel:
Rob CPA channel was created with a mission to provide viewers with accurate content so they can be proactive in their tax planning strategies and build financial wealth. The video topics I selected reflect real-world issues that I’ve seen our clients experience relating to their personal tax returns, retirement plans, and accounting.

The channel allows me to share my passion for taxes, personal finance, and accounting. I create content I wish schools and entrepreneurship programs/accelerators would teach their students and companies. I take complex topics and simplify them for the viewers as well as show examples.

I will be covering the following topics:

- Personal & business tax planning tips;
- Personal finance;
- Accounting;
- Investing;
- Entrepreneurship

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