IRS audits: What does it mean to be audited, and what are common IRS audit triggers?
Most people think of the word “audit” as one of the worst five-letter words in the English language. But in many cases, the fear of an audit from tax administration is actually worse than the audit itself. Plus, the average person stands a small chance of being audited. Chances increase when tax fraud and tax evasion come into the picture.
When the IRS audits your return, they look to see if you correctly reported tax information and paid the right amount of tax. If you view it another way, it’s just a review to keep the whole tax system fair.
You have nothing to worry about if you reported your information correctly and kept good tax records. But if you find yourself in the position of being audited, there are a few things you can do to course-correct your trajectory back on track. Follow along as we outline the steps below!
If you’re worried you could be audited by tax administration for a tax return from a decade ago, don’t be! The IRS typically audits three years back. If they identify a substantial error, they could add additional years. The IRS tries to audit tax returns when they are filed.
So, what happens if you get audited by the IRS? Essentially, there are two ways you could be audited: by mail or in person. We’ll walk through each case below so you can easily follow along.
The IRS audit letter: The mail audit process
The most common type of individual tax return audit is a mail audit, also called a correspondence audit. The IRS will mail an official notice requesting specific answers and documents to support a triggering detail within your filed return. Examples include income, deductions, or a tax credit.
When your response is requested, the most important things to do are:
● Respond to the IRS with all evidence by the specified deadline.
● Remain actively involved with the process, including any filed appeals or disputes.
When exchanging documents with the IRS, be sure to include an explanation of how each item supports your filed return. When information can’t be located, providing a thorough explanation via “oral testimony” could be the next step.
Suppose you disagree with the IRS decision on your return, including any proposed penalties. In that case, you may be able to file an appeal with the IRS.
The face-to-face audit process
Audits within an IRS office are called the office audit or desk audit. Office auditors, called tax examiners, focus on specific items on the questionable tax return. When the IRS conducts an audit at your home or business location, it’s called a field audit.
Revenue agents review all types of returns, especially taxpayers with a high net worth or complicated returns with potential mistakes.
You can expect four phases during an office or field audit.
1. Audit notification and preparation: The IRS notifies you (or both you and your authorized tax preparer) about the audit, almost always by mail. Usually, the audit will be for a return you filed within the past two to three years. The IRS will send a request for information (IRS Form 4564, called an Information Document Request, or IDR). The IDR will show you what the IRS is interested in auditing. But don’t assume the audit ends there; office and field audits involve more than one year and often expand to other issues.
2. Initial interview: Office audits take a few hours to complete.For field audits, this process can take up to a full day, depending on the complexity of the tax return. During this time, you will give the IRS auditor the big picture of your circumstances, your business, the tax year under examination, and the items requested by the auditor. A tax preparer can also represent you during this process.
3. Issue development: Inevitably, the IRS will focus on a few items — and might ask a lot of questions about your return, finances, and more. In this stage, you or your tax preparer must advocate for your case and provide explanations to the auditor. If the auditor proposes an adjustment to the return and/or penalties, you will need to decide to agree or start preparing your appeal.
4. Finalizing the audit and appealing the decision, if necessary: If the appeals process is your next step, an impartial person in the IRS Office of Appeals will consider your petition at an appeals hearing. This hearing is held months after the audit has ended and will likely take place by phone. You can request a face-to-face meeting with the appeals officer if you prefer. If you disagree with the decision, you could eventually take your case to the U.S. Tax Court.
The audit process can be time-consuming, but it doesn’t last forever. Once you’ve provided the necessary documentation, cooperated with the auditor, and addressed any issues, the audit will eventually come to a resolution, and you can put it behind you.
There may be special circumstances where the IRS offers digital alternatives for submitting documentation or working with the IRS examiner through Secure Messaging and the Document Upload Tool (DUT).
However, you need an invite to participate in these digital options. Review your notice carefully to see if this option is available in your case and for information on how to use them.
The misconceptions surrounding IRS audits can evoke feelings of anxiety. Let’s debunk some of the most common ones to put your mind at ease:
The IRS selects returns for audit in different ways. Some are random, and some are a result of a related return or incomplete/inaccurate information.
Some audits result from a computerized review process, instead of by humans with potential personal bias. In some cases, IRS programs randomly select returns for audit.
However, there are other audit triggers, like return mismatches. Mismatched information on your tax return is one of the easiest ways to invite extra IRS scrutiny. If your tax return reports income information that doesn’t match information the IRS has on file (like Forms W-2 and 1099), you’ll likely receive a CP2000 notice asking you to explain the difference.
If you receive any incorrect forms from a payer (ex. your financial institution), it’s best to ask them to fix the form as quickly as possible. A corrected copy will be sent to the IRS, hopefully solving the mismatch issue.
Another potential trigger is a related return audit. For example, if you received a Schedule K-1 from a partnership, the IRS could audit the partnership return. This type of audit is mainly designed to ensure complete and accurate reporting of information across returns that affect one another.
An IRS letter is not necessarily a bill, so wait to break out your checkbook if you can show that your tax return was correct.
An audit becomes a tax bill only if you:
- Agree with the proposed changes the IRS is making during the audit
- Fail to respond to the notice by the IRS deadline
- Don’t provide the IRS with records supporting your original return
To make sure your IRS letter doesn’t result in a tax bill, submit a complete and timely response to the IRS showing you were entitled to claim all the income, deductions, and credits you reported. When sending copies of information to the IRS, use certified mail so that you have confirmation that the IRS received the information.
On the other hand, if the IRS is correct and you’ll owe a tax bill, remember that the IRS offers a range of payment options.
If you receive an IRS notice or audit letter requesting information, now is the time to deal with this. But don’t panic. There’s a process for dealing with IRS audits, and you can get expert help handling the issue.
But you need to understand that if you miss the IRS deadlines in your letter, you could be giving up your rights to prove what you originally reported was correct and to dispute any additional taxes due. Read your letter carefully to see how long you have to respond and start going through your documentation immediately.
Some taxpayers fear that they’ll be subjected to more IRS audits in the future once they’re audited. In reality, most audits are specific to a particular tax year or issue. Once the audit is resolved, you can move forward without worry.
Make sure to respond to all requests for information from the IRS.
Requesting additional time to respond to an IRS letter or audit notice i[FA2] s a great option for those who find themselves unable to provide all documentation before the IRS deadline. This choice is a protective measure to offset additional taxes and penalties you could be charged.
If you’ve already missed the deadline and you were charged additional taxes, you can request audit reconsideration from the IRS. You may also want to find expert help from a tax professional to weigh your options as this process can become complicated.
IRS audits are a part of the tax system designed to ensure compliance. Understanding the realities of audits can help alleviate some of the anxiety and misconceptions surrounding them. If you ever face an audit, it’s essential to approach it with transparency, cooperation, and, when needed, professional guidance to navigate the process effectively.
H&R Block can help you handle penalty notices and will communicate with the Internal Revenue Service for you. Get help from a trusted professional at H&R Block who can handle audits and other IRS notices.
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