Many businesses fear that if they submit for tax credits and incentives, an IRS audit becomes more likely. Instead of allowing clients to miss valuable tax credit opportunities, CPA firms should stress that having guidance and audit support is a solution for businesses inexperienced in the audit process.

It is also important for your clients to understand how businesses are selected to be audited. Contrary to what many people believe, there are no automatic triggers for an audit. Your clients are not necessarily selected to be audited because they pursue a certain tax incentive.

Returns that your client files with the IRS are compared against statistically valid norms for similar returns. These comparable returns make up a random sample and are selected as part of the National Research Program. Next, an experienced auditor reviews your client’s return and makes note of questionable items.

A manager then reviews your client’s return and either accepts it as filed or passes it back to an auditor. If the return goes back to an auditor, the auditor may also accept it as filed or schedule an appointment with your client.

While the IRS process of examining returns may sound foreboding, CPA firms should assure clients that they are unlikely to be selected for an audit. On average, only about 1 percent of filers are audited.

Alternate Ways To Substantiate Tax Credit Claims

Most tax experts agree that it is preferable to have proper documentation when a business’s claims for tax credits and incentives come under investigation by the IRS. CPA firms should encourage their clients to keep employment documentation and other paperwork for three years or more.

However, if your client wishes to pursue a tax incentive but failed to document expenses, there are alternate methods for substantiating tax credit claims. The IRS allows for third-party documentation, oral testimony and other forms of verification. For example, your client may benefit by taking the time to retrieve bank records or credit card statements that document R&D expenses. 

Claiming Missed Deductions

While audits are usually seen in a negative light, many businesses don’t understand that an audit also offers them tax-saving opportunities. During an audit, businesses are able to submit documentation for expenses they did not claim on their tax return. If your client has overlooked a cost-saving tax solution in their previous return, they may be able to claim an additional deduction.

Speaking with a tax expert is a helpful first step when you have questions about how to better prepare your clients for a potential audit. Additionally, a tax expert is able to support you through the process should your client be selected for an audit.

If your CPA firm does not offer audit representation, it benefits you and your clients to partner with a tax expert. Experienced tax advisors have the knowledge and expertise to advise CPA firms on the best course of action when clients must substantiate claims for tax credits and incentives.

Want to learn more about tax credit opportunities that help your clients increase tax savings? Find out if your clients are eligible to claim R&D credits.