Getting a notice that you’re facing an IRS audit can be unnerving, to say the least. Last year, 3.8 of every thousand tax returns were audited.
An IRS audit is something no one wants to face, but it’s always a possibility. Even if you’ve followed every rule for filing your taxes and think you have accurate returns, something could go wrong.
The IRS audit process doesn’t have to be stressful. It’s a good idea to be prepared just in case. We can help!
Here’s everything you need to know if you’re audited by IRS.
Why Am I Being Audited?
Being audited doesn’t mean you’ve done something wrong. It doesn’t indicate that you’re in trouble or being targeted.
There are a variety of methods the IRS uses to select people or businesses for an audit. Two common reasons include:
Sometimes an audit is based on random selection. The recipients are chosen for an audit via computer screening. It doesn’t mean there’s a problem or that you’ve done anything wrong.
You could be selected for an audit if the IRS sees a discrepancy between your returns and other taxpayers’ returns. This is often the case for investors or business partners when a business associate has been chosen for an audit.
If you run a small business, you should know there are certain small business tax triggers. These include:
- Excessive spending
- Misclassifying employees
- Types of deductions
if you receive a notice of an audit, it doesn’t mean your business is in trouble or a crime has been committed. Take the time to verify all the information on your previous tax return to confirm you paid the right amount.
Enlist the help of a qualified tax professional as soon as possible.
What Are the Chances of Being Audited?
Getting a notice that you’re being audited is concerning, but it’s not as common as you may think. The chances of being audited are pretty slim.
According to the New York Post, your chances of an audit are now less than 0.5%. Various factors like your type and level of income may affect these odds.
People who earn over $1 million and those who make money from a sole proprietorship, partnership, rental properties, etc. have a greater chance of getting audited.
If you took over the typical amount of itemized deductions, you could be subject to an audit. This may include medical expenses, dental expenses, charitable contributions, taxes, and miscellaneous expenses.
Other issues that could attract IRS attention include:
- A return that conflicts with your W-2s or 1099s
- Returns with rental property loss deductions
- Returns with alimony deductions
- A return that’s missing the required schedulers
- Returns with earned income tax credits
- A return without the necessary alternative minimum tax form
- A return prepared by someone who has had legal issues in the past
Types of Audits
Not every audit is the same. Some of the differences include:
A correspondence audit may occur if you make a simple mistake and must mail relevant information to the IRS. For example, if you failed to submit a schedule with your return, you may be asked to provide this information by mail.
Once you submit the correct information, there is no further action if the IRS is satisfied.
Typically, if you receive notice of an office audit, you will need to bring your tax records to the IRS office. This could be in regards to a high deduction in one area or another issue.
The IRS may ask for receipts to prove your expenditures or other documents related to the issue at hand.
If you receive notice of a field audit, the auditor will visit your home or office. They may ask to review certain paperwork or evidence to verify the accuracy of your tax return.
In some cases, the auditor may visit the office of your CPA, attorney, or other tax professional involved with the financial aspects of your business.
The IRS can launch a criminal investigation if they believe you or your business has conducted fraud or owes a large sum in taxes.
Know Your Rights
An audit can be an intimidating process. It’s important to know your rights.
If you’re selected for an audit, you have the right to:
- An explanation of how the process will work
- Representation by a CPA, attorney, or enrolled agent
- Claim new deductions you did not originally claim
- Request assistance from the IRS national office on technical issues
What Information Will the IRS Want?
The IRS will inform you what information they want to see. They may ask to see the documentation that supports your tax return claims.
Typical documents include:
- Legal papers
- Canceled checks
- Loan agreements
- Employment documents
Try to keep all of your information organized by year and type of document. Include any information that details relevant transactions.
If you have questions about the documentation you need, contact the auditor for assistance.
Taxpayer Bill of Rights
The Taxpayer Bill of Rights was introduced in 2014. This document helps people understand the complexity of taxes and their basic rights as taxpayers.
There are 10 rights of taxpayers and those being audited. These include:
- The right to be informed
- The right to pay only what you owe
- The right to quality service
- The right to challenge an IRS position and be heard
- The right to appeal
- The right to privacy
- The right to finality
- The right to have representation
- The right to confidentiality
- The right to a fair tax system
It’s easy to get stressed when you’re faced with an audit. Knowing your rights as a taxpayer can make the process much easier.
How Does the IRS Notify You of an Audit?
If the IRS plans to audit your taxes, you’ll receive a notification in the mail. The IRS does not initiate an audit with an email or a phone call.
The IRS will provide their contact information and inform you about what to do next. They may conduct the audit by mail or in person.
Follow their instructions and collect the required documents. If they ask for an audit by mail, you can ask for an in-person audit instead.
How Long Will an Audit Take?
The IRS does not put a time limit on audits. The day you receive notice, the auditing process begins.
The timeline depends on the type of audit, the auditor’s availability, the accuracy of your evidence, and your response to their findings.
If you disagree with the auditor’s findings, the process isn’t over. You will continue to work with the IRS to reach a resolution. You can file an appeal, which lengthens the auditing process.
Remember to maintain organized personal and business records. This can help prevent an audit but can also shorten the process if an audit is underway.
Does the IRS Have a Statute of Limitations?
The statute of limitations depends on the error the IRS finds on your tax returns. Typically they can use tax returns filed within the last three years.
However, they can go back six years. This happens only if there’s a big mistake they’re investigating.
Typically, IRS audits consist of tax returns filed within the last two years. By law, you’re supposed to keep the records you used for filing your taxes for three years.
It’s a good idea to keep records for the previous six years in case the IRS asks to see those returns. It’s always a good idea to enlist the help of a tax professional when filing taxes or preparing for an audit.
IRS Audit Penalties
If the auditor determines you haven’t paid enough in taxes, you may face penalties in addition to your tax bill. There are a variety of reasons the IRS could penalize you. These include:
- Understating what you owe in taxes
- Failing to pay your taxes
- Error on your tax return
There are a variety of possible penalties following an audit. The penalties vary depending on your income and the seriousness of the error.
If you disagree with the examiner’s decision and feel you have accurate returns, you can ask for an audit reconsideration before you pay anything. If you pay the taxes and penalties and later decide to disagree with the decision, you can request a refund.
If you request an audit reconsideration and the IRS denies it, you can request an offer in compromise. Although chances of approval are low, an offer in compromise allows you to settle your tax burden for a fraction of what you actually owe.
The IRS can add an additional penalty to the amount of taxes you already owe. You could face a 20% or 40% penalty for the error on your tax return.
The percentage is based on the severity of the error. For serious cases such as fraud, you could face up to a 75% penalty.
If you have a sizable tax debt you cannot pay, the IRS has the right to seize your property. They can then sell it to cover the money you owe if you don’t have limited liability protection.
This severe penalty is reserved for the most serious cases of tax evasion. Business owners who purposely commit fraud to avoid paying taxes can face up to five years in jail, steep fines, or both.
Fines in the most serious cases can range from $250,000 to $500,000 for corporations.
Fraud and negligence are very different things. If the IRS finds a mistake on your tax returns, they will determine if it’s fraud or negligence.
Should You Pay the Penalties?
In most cases, the answer is yes. It’s in your best interest to try to pay any penalties in a timely manner.
However, if you feel there’s been a mistake, you have the option to file a dispute of the examiner’s findings and any changes the IRS made to your tax return.
How Does an IRS Audit Work?
The IRS may notice an area of concern on your current tax return or may decide to audit returns from previous years. They review and substantiate the information on your return, such as income level and any deductions.
The audit process usually lasts two to three months. You receive an audit notice through the mail.
At this point, it would be very helpful to have a tax professional to guide you through the process and communicate with the tax examiner. Once an audit is conducted, the IRS files a report.
As a taxpayer, you have 30 days to accept or reject their findings. If you reject, you are protesting the examiner’s decision.
If there’s no resolution on the deficiency amount, the IRS then issues a Notice of Deficiency. This gives you 90 days to challenge the findings and petition the tax court.
The goal is to reach an agreement and have a final assessment. Once this is done, you have payment options, including an installment agreement. Then the collection phase begins.
Tips to Remember If You’re Audited by IRS
- You have the right to request a postponement to organize your records
- Read the Taxpayer Bill of Rights
- Hire a tax professional before your IRS interview
- Bring all requested documents to the audit
- Be courteous and professional and expect the same from the IRS
- Do not volunteer unrequested information
- Be honest
- Keep records of everything you submit for the audit
- Speak to the auditor’s supervisor if you feel you are treated unfairly
- If you don’t understand the examination report, contact the auditor
- If you don’t agree with the results, work toward a compromise
The good news is most audits are not serious. If you are unhappy with the result, you can appeal.
In most cases, the dispute can be resolved through Alternative Dispute Remediation (ADR). If this doesn’t work, you can file an appeal with the IRS Appeals Office.
Hire a Qualified Tax Professional
If you receive notice that you will be audited by IRS, it can be a shock. You may be worried about how it will play out and what effect it will have on your family, finances, or business.
Remember that not every audit is serious. It may be a simple mistake that you can easily solve.
Whatever the reason for the audit, you have rights. At Polston Tax Resolution and Accounting, we know how stressful it can be to owe back taxes.
Our team of tax professionals is here to help you resolve your tax issues and take the burden off your shoulders.
Contact Polston Tax Resolution and Accounting today to discuss your tax needs.
A recent article from the Washington Post cites data from 2019, where 1.3% of taxpayers earning one million to five million dollars were audited. Further, only 0.2% of those earning $25,000 to $50,000 were audited. You must understand this is not a personal attack when you receive an audit letter. The IRS has a computer...
In June 2023, the IRS began sending millions of CP14 notices to taxpayers countrywide. Those who receive these statements typically have many questions about what they mean and how to handle them. The Polston Tax Resolution & Accounting professionals are here with the answers you need. What Is an IRS CP14 Notice? An IRS CP14...
In 2022, Americans owe a whopping $120 billion in back taxes, according to the IRS. Now some people owe a year’s worth of taxes and can quickly get back on track. At the same time, others owe years and years’ worth of taxes and face severe consequences for their unpaid taxes. Have you been worried...
Receiving a letter from the IRS or the state can be intimidating, especially if you’re unsure what the notice is for or what to do next. Fortunately, many notices are nothing to worry about and are purely informative. Below, we take a look at everything you need to do — and what not to do...
The Employee Retention Tax Credit (ERC or ERTC) is a tax credit that the United States government introduced as part of the Coronavirus Aid, Relief and Economic Security (CARES) Act. The ERC was meant to help businesses across the country that were feeling the negative impacts of the COVID-19 pandemic. Eligible companies are still able...