Tax Audits are one of the most terrifying things a taxpayer can endure. Most taxpayers don’t know what being audited by the IRS entails and usually don’t know what to do if they are audited. IRS audits can be confusing to most taxpayers as most don’t know what the IRS is looking for when they determine who to audit each year and what they are looking for when they perform the tax audit. Tax 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 that doesn’t mean it won’t happen to you. The best way to help yourself in a tax audit is to know why and what a tax audit means and to get a tax attorney to help represent you. Here is the information you need to know if you are selected for a tax audit by the IRS. Finding tax audit help can be hard but knowing the facts can make it easier.
There are a few different types of audits — a mail audit, office or desk audit or a field audit. Most IRS audits are conducted by mail, and only a quarter of the audits are conducted in person by the IRS.
A mail-in audit is basically just a paperwork request because the IRS is either missing paperwork or needs paperwork for an item on your tax return. Typically, mail tax audits involve simple issues, such as:
A mail tax audit is very deadline-oriented, and it is important that you mail in the items requested. The IRS could ask for any of the following:
Mail audits are simple and less intrusive, and many times, the audit ends in a change to the tax return.
In-office tax audits are a little bit more serious than mail-in audits and tend to be more in-depth than others. If you face an office audit, the IRS is most likely looking for improper deductions or underreported income.
During this type of tax audit, you’ll have a meeting with an IRS auditor referred to as a Tax Compliance Officer. This auditor will discuss your tax return with you and inspect your records. Office audits are conducted to ensure you are reporting your income accurately and paying the correct amount of tax. To support your federal tax return, you may need to provide some paperwork.
In a field audit, you will meet with an IRS agent known as a Revenue Officer. This meeting could occur at your place of business, home or your tax preparer’s office. Field tax audits revolve around more complicated issues and include a thorough investigation of your belongings and your home or business. This type of audit comprehensively reviews your entire financial record.
During a field audit, the IRS agent will generally request your accounting records and bank statements. If you don’t provide these documents to the agent, they will likely obtain them from your accountant or bank. The agent will examine your lifestyle and compare it against your reported income. If the IRS believes your lifestyle exceeds your income, they may assume you have unreported income.
You will know the time and date of your field audit, as it will be listed in the letter from the IRS. These tax audits vary in length, depending on:
Speak with a tax attorney at Polston Tax and have us handle the audit process to ensure every step goes smoothly.
The primary objective of the IRS in identifying and selecting returns for examination is to try to promote the highest degree of voluntary compliance. One way you could be selected for an audit is by being randomly selected. Some federal tax returns are selected solely based on a statistical formula. The IRS compares your federal tax return against the “norms” for similar returns. These “norms” are created from audits of a statistically valid random sample of returns. Another way you could be selected for an IRS audit is if you have issues or transactions with another taxpayer, such as a business partner or investor, that was selected for an audit.
It’s important to know that the primary IRS statute of limitations for a tax audit is three years from when the federal tax 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 federal tax returns each year for random examinations. Of those 50,000 only about 2,000 taxpayers will have to submit a full tax 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 chooses for the tax audit is always a lot larger than the list of people who actually get audited.
Now there are some steps you can take to help your chances of being chosen for an IRS Tax audit become smaller. You should first and foremost make sure your taxes are filed correctly. Make sure all the numbers match and add up to your forms. It may seem simple, but double check they your numbers add up correctly. One of the most common mistakes the IRS sees on a federal tax return is incorrect math. Use a calculator or double check yourself. Don’t round up numbers or guess if you’re not sure. If you’re trying to choose whether to file online or a through a paper return, file online. 21% of paper filers have some type of errors on their federal tax return compared to the 1% of online filers. If you take deductions on your federal tax return, make sure you have the proper substation to help back up those deductions. Keep in mind filing your tax return late does not help you avoid being audited by the IRS. The IRS can audit anyone for up to three years after the return is filed, not when it is due.
If you are selected for an IRS tax 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.
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.
If you are chosen for an IRS audit, there are some things you need to do and some things you should avoid while you are being audited.
There are three possible conclusions to an IRS tax audit — agreed, disagreed or no change.
If you agree with the proposed changes, you will sign an examination report or a similar form. If you disagree with the findings from the audit, you can go through mediation or file an appeal if the statute of limitations has not expired. The best way to appeal an IRS decision on an audit is by having a tax attorney from Polston Tax on your side.
The types of documents you need for an audit can vary by the type of audit you’re going through and the agent who is doing the audit. The IRS agent will tell you directly what items and paperwork they need. This list can include hard copies of documents or electronic ones. Ask your agent what is acceptable. Typical documents the IRS will ask for in a tax 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. 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.
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. If you do not hear back from the IRS, you may try calling the IRS agent or the IRS directly to make sure they got your response or documents. If they don’t receive your documentation, you could face penalties or have collection action taken against you.
Generally, the IRS can include tax returns filed within the last three years in an IRS tax 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.
The length of your IRS tax audit can vary depending on the factors of your audit. The length of your tax 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. It’s important to meet all the deadlines given to you by the Revenue Officer or Tax Compliance officer, not meeting these deadlines can make the process longer and slower.
Trying to navigate an audit can be difficult, especially if you have a lot going on personally or in your business. That’s why we are here to help you. We know it can get tricky and stressful, and that’s why the tax attorneys at Polston Tax are ready to represent you against the IRS and help you file an appeal if necessary.
Since 2001, we have offered tax audit representation services to people like you. Our team includes tax attorneys and accomplished tax professionals with extensive experience representing both individuals and businesses during the auditing process. We know the language, and we know the tax law and how it can be applied. Contact us at Polston Tax to schedule your free consultation.