Audits can be scary and confusing to most taxpayers. Most don’t know how or what the IRS looks at to determine who to audit each year. Audits can be a long and exhaustive process that examines every aspect of your financial history for the tax year in question. The average taxpayer won’t be audited in their lifetime, but it could happen to you. To help you learn more about audits, we have your biggest questions about IRS audits and the answers for those very important questions.
1.) How are taxpayers chosen for an audit?
The primary objective of the IRS in identifying and selecting returns for examination is to try to promote the highest degree of voluntary compliance. Tax returns are classified and selected for examination by the following computer and/or manual identification. Each year when you file your individual return and/or a corporation return having no balance sheet or assets under $10,000.00, the IRS will use a mathematical computer-based formula to identify certain basic return characteristics. The weights are then added together to produce a score. The higher this score is, the higher the potential an examination of your return will result in a change to your income tax liability. Once the DIF score is produced, returns are identified and classified for examination by an auditor and are further identified for the kind of examination to be performed (i.e., correspondence, office, or field). Traditionally, the primary IRS statute of limitations was three years from when the return was filed. It is important to note there are many exceptions that give the IRS six years or longer. The IRS typically examines 50,000 random tax returns each year for random examinations. Of those 50,000 only about 2,000 taxpayers will have to submit a full audit. If you have an out-of-the norm tax return, you usually are on the list to get audited. The amount of people the computer choses for audit is always a lot larger than the list of people who get audited. Learn more about why you were chosen for an audit here. https://www.irs.gov/businesses/small-businesses-self-employed/irs-audits#audit-selection
2.) How will I know if I am selected for an audit?
If you are selected for an audit you will be notified by mail. The initial letter from the IRS will include instructions on how to proceed. You will get either a request for paperwork audit, an in-office audit, or a field audit.
Request for Paperwork Audit
A request for paperwork audit is typically the easiest audit and is usually just because the IRS needs some missing paperwork. This type of audit is conducted mostly by mail and is just you submitting paperwork to back up your tax return.
An In-office audit is a little more serious and is usually more in depth. If you are selected for this type of audit, the IRS may be looking for unreported income or improper deductions. In this audit, you will meet with an IRS auditor who will talk to you about your tax return and they will inspect all of your records. The purpose of an office audit is to make sure you are accurately reporting income and paying the lawful amount of tax.
The most serious type of audit is a field audit. In this type of audit, you will meet the IRS at your home, place of business or your tax preparer’s office. This type of audit includes a thorough investigation of your home and belongings. A field audit is a comprehensive review of your entire financial records. The agent in this audit will usually request your bank statements, accounting records and other items. If you do not give the agent the documents, they will usually summon them from your bank or accountant. Agents in these audits will look at your lifestyle and compare it to your reported income. If the agent believes you are living beyond your income or debt, they can assume you have unreported income.
When a taxpayer is first selected for audit, he or she will be notified by mail. This initial contact letter will outline whether you are facing a correspondence, in-office, or field exam as well as what tax period(s) and items are being examined. Additionally, you will receive a deadline date to provide paperwork needed to prove the items being examined.
A correspondence exam is the most common type of audit. These exams typically involve simple issues ranging, but not limited to unreported income, alimony, dependent claims, education credits, etc. They are typically completed by correspondence and telephone. It is important to take notice that these types of exams are heavy deadline oriented. As such, it is imperative for a taxpayer to respond to the IRS’s document requests.
The next type of exam involves an in-office audit. The IRS will assign an individual agent to your case, known as a Tax Compliance Officer. This type of audit is a little more serious and is usually more in depth. If you are selected for this type of audit, the IRS may be looking for unreported income or improper deductions. In this audit, you will meet with an IRS auditor who will talk to you about your tax return and they will inspect all your records. The purpose of an office audit is to make sure you are accurately reporting income and paying the lawful amount of tax.
The last type of audit, which is the most serious type of exam is a field audit, and the IRS agent involved is a Revenue Agent. These types of exams revolve around more complicated issues ranging from small “Schedule C” businesses to the largest multi-national corporations. The term field audit is used because from the IRS perspective these types of audits are done “out in the field” as opposed to in their office. During these types of audits, the IRS can visit your home or your place of business to do the audit. The letter from the IRS will indicate the date and time the field audit will take place. These audits can last anywhere from one day to a week, depending on the size of the business. When the agent arrives to perform the audit, they can review financial records, interview employees, and tour the business.
3.) What documents do I need for an audit?
The types of documents you need for an audit can vary by the type of audit you’re going through and the agent whose doing the audit. The IRS will tell you directly what items they need. This list can include hardcopies of documents or electronic ones. Ask your agent what is acceptable. Typical documents you need for an audit are receipts, bills, canceled checks, legal papers like divorce settlements or property acquisitions, loan agreements, tickets, medical or dental records, theft or loss documents, employment documents, or a Schedule K-1. Here is a list from the IRS of the typical records they will request. https://www.irs.gov/businesses/small-businesses-self-employed/audits-records-request The law requires you to keep all records you used to prepare your tax return for at least three years from the date the tax return was filed.
4.) How do I know the IRS got my response or document?
With any delivery service you use, you can always request confirmation that the IRS has received it. You can also call or contact the agent you are working with to see if they received it.
5.) How far back can the IRS go to audit my return?
Generally, the IRS can include returns filed within the last three years in an audit. If the IRS finds a substantial error, they may add additional years, but they usually don’t go back more than the last 6 years. The IRS tries to audit tax returns as soon as possible after they are filed, but it could be a year or so after you file that you get audited.
6.) How long does an audit take?
The length of your audit can vary depending on the factors of your audit. The length of your audit depends on the type of audit, the complexity of the issues, the availability of information requested, the availability for parties to have meetings and your agreement or disagreement with the findings. Getting the documents needed to the IRS can help move your audit along, but doesn’t guarantee it will be done sooner.
7.) How does the IRS conclude an audit?
An audit can be concluded one of three ways:
-No change, meaning an audit in which you have substantiated all of the items being reviewed and results in no changes in the taxes you owe
– Agreed, meaning an audit where the IRS proposed changes and you understand and agree with the changes. This can be changes to how much you owe or deductions you take.
– Disagreed, meaning an audit where the IRS has proposed changes and you understand but disagree with the changes.
If you agree with the audits, you will be asked to sign the examination report or a similar form depending upon the type of audit conducted. If you disagree with the audit findings, you can either request a conference with an IRS manager, go through mediation or you can file an appeal if there is enough time remaining on the statute of limitations.
If you find yourself under audit from the IRS and aren’t sure what you should do next, its important to get tax audit respresentation. Thats where Polston Tax can help. Our team of Tax Attorneys can help you navigate your audit and make sure that someone is there to negotiate with the IRS. Call us now at 844-841-9857 or visit PolstonTax.com to schedule your free consultation.