The IRS conducts audits to verify income and expenses claimed on tax returns. For 2020, the IRS audited 509,917 tax returns, which resulted in recommended additional tax of more than $12.9 billion. While your chances of getting audited are low, it is still possible to get selected by the IRS.
Sometimes you may be audited simply for having a complicated tax return or because the IRS thinks you may have more income than you claimed on your return. You’re also at greater risk of being audited if you are a high-income earner. Before you are audited, it’s important to know what an audit entails and what could happen during the audit. Here are some things to keep in mind if the IRS selects you for an audit!
Types of Tax Audits
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:
- Unreported income
- Education credits
- Dependent claims
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:
- Legal papers
- Medical records
- Canceled checks
- Loan agreements
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:
- The complexity of the issues
- The size of the business
- The availability of requested information
- The availability of both parties to participate in meetings
- Whether you agree or disagree with the findings
Speak with a tax attorney at Polston Tax and have us handle the audit process to ensure every step goes smoothly.
Possible Outcomes of a Tax Audit
There are three possible conclusions to an IRS tax audit — agreed, disagreed or no change.
- Agreed: This refers to an audit in which the IRS proposes changes to your tax return and the amount of taxes you owe, and you agree to these changes. Possible changes include the amount you owe or the deductions you take.
- Disagreed: This refers to an audit in which the IRS proposes changes to your tax return that you disagree with.
- No change: This refers to an audit in which you have substantiated the items being reviewed, and the result is no changes to your tax return or the taxes owed.
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.
What to Do in a Tax Audit
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.
- Take immediate action: Ignoring the audit will not be beneficial for the taxpayer. If you are thinking that it will just go away if you ignore it, you are wrong. The IRS will not forget about you or the taxes they think you will owe.
- Tell the auditor the truth: Lying to the auditor is a federal crime. Be upfront and present the facts to the IRS auditor. They will find out if you are lying or trying to hide something. If the auditor thinks you are lying or hiding information or even money, they will not hesitate to reach out to a third party, like family, friends or business partners, and question them if they think they will give them the information.
- Keep in mind the IRS auditor doesn’t have the final say in the audit: If you do not agree with the auditor’s findings, you can appeal their decision. You can file an appeal, and then you will be able to present your case to an appeals officer. If you still don’t agree with the appeals officer’s findings, you can dispute those findings in Tax Court.
- File all your tax returns before meeting with the auditor: If you are selected for an audit, it is very important that you file all your missing tax returns. If you have missing tax returns during the audit, the auditor can file the returns for you, which is called a substitute for return. They will not claim any deductions, credits or dependents for you, which can lead to a large tax balance.
- Be prepared for the audit: Not being prepared can lead to frustration on the auditor’s part and could lead to you not being able to fully present your case. You are your best advocate in an audit. Being prepared is especially important if you don’t have a tax attorney. You need to know what the tax code means and how it is applied so you can plead your case to the auditor.
- Elevate issues to the auditor’s manager: You might feel like the audit is dragging on forever, and you are not getting anywhere with the auditor. If this arises, you should ask to speak with the auditor’s manager. They will listen to your side of the case and will intervene if needed on your behalf.
- Get all requested information in writing: Make sure you have everything in writing from the auditor. If they forget or get confused over what you agreed on, you then have the proof to show them. Don’t be afraid to take charge of the audit. You can request that things be put into writing so you have a record of it. This will benefit you if you decide to appeal the audit findings.
- Remember and obey deadlines: In an audit, there are a lot of deadlines that include the audit appointment, deadlines to provide information, deadline to respond to the initial audit report, the deadline to petition IRS appeals, the deadline to petition tax court and many others. As a taxpayer, it is your job to remember all these deadlines. The auditor will not remind you of them.
- Contest the penalties: Typically, taxpayers do not argue when penalties are applied. In the past, IRS auditors have been criticized for tacking on extra penalties to taxpayers. It is your job as the taxpayer to pay attention to everything the auditor is doing. This could potentially save you money.
- Seek a higher authority: IRS audits are no easy walk in the park. You need to have knowledge of how to navigate the audit, know your rights as a taxpayer and how to advocate for yourself. Unless you are a seasoned veteran with audits, it would be in your best interest to seek advice from a tax professional at Polston Tax. Tax professionals deal with the IRS every day and will be able to navigate you through the audit and fight for you on your behalf.
If you want more guidance about what to do in a tax audit, turn to Polston Tax for our IRS audit representation services.
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.