IRS Auditing and Document Standards in Cloud Hosting

Concept image for filing federal income taxes online and being audited. Computer keyboard, calculator and pen are placed on income tax form 1040. The 'word' AUDIT is stamped on the form 1040.

What Exactly is Cloud Hosting?

Essentially, cloud hosting is a service providing the host; the host provides the users with virtual servers for extracting and storing data which is then connected to a vast and complex network of physical web servers provided at the back end.

Usually, the clients could use the cloud hosting services for as many times as they want depending on their usage and requirements. Cloud hosting is an ultimate solution for cost-effective storage of data without using up a lot of physical storage disks on your end. Furthermore, the client is not required to pay for the extra capacity and pays only for the storage being used by them. 

What is an IRS Audit?

An IRS Audit is essentially a detailed review of an organization or a person’s accounts and the information pertaining to the financials. The audit checks that all information is reported correctly, all tax laws are being followed, and the company or individual is paying their taxes as required and, hence, verifying all the amounts paid as tax to be correct.

The Three Basic Types of IRS Audits

If you or your organization has been earning millions, there is a one-sixth chance that you might be selected for an IRS audit. If you are earning an average pay, your chances are even. An IRS audit is random and is a detailed analysis of your finances to make sure that all money is earned from lawful sources and that all taxes are being paid according to the law.

Usually, an IRS audit is triggered if the IRS notices unlawful activity that is related to your revenues or earnings. It could also be performed because the IRS notices that the taxes required to be paid are not being paid. An example of such activity is a sudden massive drop in your revenues or earnings that might point towards the fact that you are trying to hide money to avoid taxes. It is a very detailed auditing process in which details of your finances are combed through so that any discrepancies could be caught. The three basic types of IRS audits are explained below.

Correspondence Audits

These audits are the simplest audits of them all. Correspondence audits usually take place when you have a slight mistake in your tax returns which could be a human error based on typing in the correct amount.

Office Audits

An office audit is a bit more complicated and scary. During this audit, you are asked to go to an IRS office with all the correct paperwork that is required of you. This audit might be triggered if you have increased and high tax deductions – such as a medical expense.

Field Audits

A field audit, on the other hand, is similar to that of an office audit but the IRS approaches you. In such cases representatives from the IRS visit you at your home or workplace and request to look at certain paperwork and records of your business dealings.

In the case that you are being audited, you would be notified properly by the IRS via a call or letter. The letter or call would further let you in on the details of the required documents and paperwork that might help them assess your earning patterns and your tax paying patterns.

What Documents are usually required by the IRS?

When selected for an audit, the IRS notifies and informs you about all of the documents they might need to conduct your audit. However, some of the documents may include:

  • All documents that are of material in the administration of the internal revenue law
  • Records regarding revenues, taxes, earnings, expenses, and purchases for at least the three previous years
  • Complete employment records for the past four years at least

Documents required to meet IRS Standards in Cloud Hosting

Electronic times have made things faster and more accessible. Hence, it is important that you create digital copies of all related paperwork and store it in your cloud hosting services. When facing an IRS audit, not only are these documents readily available, they save both of parties a lot of time and effort, making the complete audit process more easy and quick.

According to the IRS website, the documents stored electronically which are acceptable for the audit should be prepared as following:

“The electronic storage system must index, store, preserve, retrieve and reproduce the electronically stored books and records in a legible format. All electronic storage systems must provide a complete and accurate record of your data that is accessible to the IRS. Electronic storage systems are also subject to the same controls and retention guidelines as those imposed on your original hard copy books and records. The original hard copy books and records may be destroyed provided that the electronic storage system has been tested to establish that the hard copy books and records are being reproduced in compliance with IRS requirements for an electronic storage system and procedures are established to ensure continued compliance with all applicable rules and regulations. “

In essence, all of these documents must be complete, accessible, and accurate while serving their purpose of proving all the possible transactions and details that are required and asked by the IRS Audit.

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