Inside an IRS Audit: Mark Hauser Explains How to Prepare For An Audit With Key Methods

As an experienced and driven professional with a career in the private equity space, Mark Hauser is no stranger to solving complex problems while navigating the rules and stratagems put in place by the Internal Revenue Service. The Internal Revenue Service collects taxes and ensures that individuals follow official tax guidelines.

Sometimes, the IRS will need to look closer at your financial documentation to ensure you correctly report and pay your taxes. An expert in private equity, Mark Hauser took time out of his day to explore the realities of an IRS audit while underscoring how to best prepare for one.

Why Does the IRS Serve a Tax Audit?

The Internal Revenue Service will execute an audit to reduce what they call the ‘tax gap.’ The Tax Gap is the space between the money the IRS receives and the amount it believes is owed to them by taxpayers.

The agency will sometimes randomly execute an audit, while other times, the audits are targeted toward specific individuals. Some audits are initiated when an individual does business with another individual already under audit.

Risks That Can Incite a Tax Audit

The IRS is almost always looking for a tax return to audit, or at least that’s how it can feel. There are many reasons why the IRS may engage in a tax audit on an individual or business. Let’s highlight a few of the most prominent reasons private equity investor Mark Hauser pointed out.

  • Failure to Report – Taxpayers earning a non-wage income must report all those earnings on their Form 1099.
  • Excess Expenses – Business deductions are typical for every business and industry, but beliefs must remain essential to the business’s overall operations. Taxpayers can incur penalties for excess business expenses.
  • Home Office – Most self-employed individuals will claim a home office deduction. The IRS has strict rules for this allowance, meaning the individual must regularly and exclusively use that portion of their home for business.
  • Schedule-C Losses – Mark Hauser points to the IRS to underscore that it will look closer at too many Schedule-C Losses from a particular business. The IRS may audit a company to determine how they continue to operate.
  • Math Errors – Nobody is perfect; math errors can manifest even during a tax return. Avoid careless mistakes by double-checking all calculations or working with a professional tax prep agent.

Potential Audit Outcomes

After the conclusion of an audit, the IRS will review documentation before declaring its decision. Mark Hauser notes that there are three fundamental outcomes of an IRS audit.

  • No Change – Taxpayers have provided sufficient evidence to report all verified claims.
  • Changes with Agreement – The IRS has proposed changes that the taxpayer understands and agrees to, signing off on a potential payment.
  • Changes with No Agreement – The taxpayer disagrees with the proposed changes by the IRS, and mediation must be extended. The taxpayer can utilize mediation to meet with the IRS manager and to appeal the decision.

Mark Hauser is a private equity expert from Cincinnati, where he operates Hauser Private Equity. Mark Hauser has sharpened his skills for many decades of work.