Falling behind on your taxes can be somewhat frustrating, especially if it is unintentional. Similarly, no one wants to get in trouble with the IRS’s federal or state law for not being up-to-date on their taxes. Therefore, it is safer to prepare for a tax audit before the IRS comes banging at your door with their dreaded papers. If you are unsure about taxation for unemployment benefits or unaware of some things about an unemployment tax audit, this blog post has you covered. Therefore, keep reading to learn more.
Knowing what a tax audit is might make it less frightening. Here’s what you should know if you receive an IRS audit notice.
- The IRS conducts a tax audit when it checks your tax return information to confirm that all provided data is valid.
- Tax audits are classified into four types: field audits, correspondence audits, taxpayer compliance measurement programs, and office audits.
- An audit might be triggered by incorrect data or incomplete tax returns.
- This article is for small company owners who want to understand how to prevent a tax audit and what to do if the IRS sends them an audit notice.
While the chances of being selected for deeper examination are relatively low, several characteristics may raise your chances of being audited. Thankfully, there are steps you can do right now to reduce the chances that you and your company may be audited by the IRS.
What is a tax audit?
It is a process of verifying all tax records to ensure that they comply with federal and state taxation policies. Essentially, filing taxes is an integral part of economic policies and differs according to states. Taxation applies to both employers and employees. Therefore, tax auditing is significant to ensure that people and corporations do not willfully or unintentionally withhold their taxes. The reason is that governments use taxation to generate revenue and are pretty strict about it. Failure to pay or file your taxes accurately can lead to grave charges of financial crimes, tax evasion, etc.
Why is a tax audit relevant?
The purpose is to ensure the willful compliance of individuals and corporate entities to taxation policies. Also, an auditing exercise on taxes helps to check tax fraud and impersonation.
The purpose of a tax audit is to accomplish the following goals:
- Monitor and guarantee the correctness of books of accounts, and have a tax auditor certify them.
- The goal of reporting specified information is to guarantee that you are adhering to the different rules of income tax legislation.
- Furthermore, tax audits guarantee that the records represent the taxpayer’s real income and that the claims for deductions made are valid.
What is an unemployment tax audit?
An unemployment tax audit is the verification of tax records that concern unemployment benefits. In other words, benefits that accrue to unemployed individuals from the government are taxable. Both federal and state income taxes affect unemployment benefits; however, the taxation is not always clear.
An unemployment audit examines an employer’s records to discover whether or not they have been paying unemployment taxes correctly. The audit might be performed by the state unemployment office or by an outside auditing firm.
Employers are chosen for an audit based on a number of characteristics, including:
- The employer’s payment of unemployment taxes
- If the employer has already been audited
- Whether or not the employer has received any complaints
An audit examines the following documents:
- Payroll documents
- Wage statistics
- Returns on Unemployment Insurance
If you are chosen for an unemployment audit, it is critical that you comply with the auditor and supply the needed information. Failure to comply may result in penalties or fines.
Do I Get A Written Notice Before A Tax Audit?
Absolutely, you will always be notified in writing in the form of a “Intent to Audit” letter. This letter is normally addressed to your last known address on file at least 30 days before the audit begins. The notification will specify the time limit during which the auditors will be studying the documents and will require that specified paperwork be gathered and forwarded to their office.
Who Gets Picked for a UI Tax Account Audit?
The majority of employers that get an Audit Notification letter are chosen at random by the Department of Labor. Nonetheless, there are few occasions where specific employers may be targeted. Employers that do not report their employees may be chosen to guarantee that their employees are correctly excluded from UC Law coverage.
Companies in industries with a high percentage of reporting mistakes are more likely to be chosen for an audit. Businesses that are known to have a reporting error or are suspected of having one are more likely to be audited than other firms across the country.
How unemployment taxes work
Usually, the Federal Unemployment Tax Act (FUTA) collaborates with state unemployment systems; together, they provide unemployment compensation to people who have lost their jobs. For example, the 2019 pandemic-COVID19 is an example of a situation that left many people unemployed for a long time. Additionally, there were exemptions provided by the American Rescue Plan Act of 2021 to unemployment taxation of $10,200 for individuals for the taxable year 2020.
Because unemployment compensation is taxable, preparing for an unemployment tax audit saves you the hassle of discrepancies in your tax records. For instance, if you have been overtaxed, the auditing process ensures that the excess is rolled over to other tax payable years as a tax refund. Usually, you will receive a paper from the IRS if there is something wrong with the tax on your unemployment compensation. When the IRS contacts you for auditing, you prepare by getting a 1099G form.
You can utilize several online paystub generators to prepare 1099 electronically as an employer or independent contractor. The essence is to ensure that all payroll information is accurately provided and that all individuals are properly classified by employment status. Now that you know how an unemployment tax audit works, it is time to move on to preparing for it. Here are three essential steps to help you prepare for an unemployment tax audit.
How to prepare for an unemployment tax audit
Acknowledge the Tax audit notice
Usually, before an audit, you will receive a notice from the authorities-IRS for instance. The notice might be through email or a letter. As a result, the best way to prepare for the auditing process is to acknowledge the notice. That way, you get to see the commencement date and other requirements by the tax authorities and other relevant documents for their verification. The best way to show acknowledgment is by sending a response through the same method the tax authorities served you the notice.
When are audits performed, and how long do they last?
The auditor is in charge of setting the audit date and time. Normal audits are performed Monday through Friday between 8:00 a.m. and 4:30 p.m. Audits appointments are excluded on major holidays. The auditor will notify a corporation of the date and time of their unemployment audit.
The length of time it takes to complete your audit is determined by various factors. Unemployment audits are often conducted in one working day for most small to medium-sized firms. Nonetheless, the state of the business’s records and any concerns identified may cause the auditor to do fieldwork for an additional number of days.
Engage a tax expert for assistance
Because tax auditing can be pretty intimidating, you might have to engage a tax expert to assist you where necessary. The reason is that such an expert will provide easy interpretations. Seeking representation is also another tip to be considered in preparing for a tax audit. You can seek the assistance of a tax expert to assist with the tax audit exercise. That way, you alleviate your worries. Another advantage of appointing a tax professional is that the Taxpayer can leverage his experience and relationship with the Tax Authorities to ensure a smooth and timely conclusion of the tax audit exercise.
Stay informed and up-to-date on your documents.
You should gather all relevant information and documents listed on the tax audit notification letter. After which, the taxpayer’s representative can review them before sharing them with the Tax Authority. Examples of some relevant documents include but are not limited to; Bank statements and all previous financial statements like W2 form, whether or not you are working. You may also have to provide evidence of previous tax payments and a 1099G to show unemployment benefits. That way, your tax expert can easily assist you with relevant explanations and interpretations before the tax audit.
Does every unemployment claim get audited?
Generally, financial claims undergo random auditing. As a result, if you happen to be audited, a prompt response to the audit request is critical. Failure to comply could lead to an unemployment insurance fraud decision and a resultant overpayment.
How long does the IRS give you to prepare for an audit?
As a general rule, the IRS has three years from the assessment date- when they officially charge you as owing tax. The assessment date begins from the period that the IRS serves you an audit notice.
How do you pass a tax audit?
As intimidating as tax audits can seem, they are an essential part of personal finance. Therefore you are better off when you pass the exercise. Essentially, it is better to prepare for the audit by acknowledging the notice and getting your documents up-to-date and organized. You might also want to engage a tax expert ot to assist you with the preparation process.