The word “audit” tends to strike fear in the hearts of American taxpayers, but the truth is that not every audit is a result of a problem or that the Internal Revenue Service suspects you of wrongdoing. There are several reasons why the IRS might want to audit your taxes and financial information, and there are several steps that you can take to make the process as painless as possible.
In light of an uptick in identity theft scams involving tax audits and returns, we want to take a moment before delving into this topic to stress that the IRS will never institute an audit process via telephone or email. Taxpayers are always alerted of an upcoming audit by U.S. mail.
Reasons for IRS Audits
Though it is certainly true that some audits are generated by irregularities, the IRS can also request an audit to verify the information contained within your tax papers, to correct a simple mistake such as failing to attach a Schedule, or because the individual taxpayer has some kind of involvement with other taxpayers — such as business partners or investors — whose paperwork raised questions. You may even have been selected for audit as a result of a random selection process designed to gauge taxpayer returns to see how they compare to national norms.
Different types of audits
There are three types of audits conducted by the IRS. In all cases, the taxpayer will be notified of the review by mail.
- Correspondence audit – Generally a result of a low-level error or omission, the agency sends out information to the taxpayer referencing the mistake and requesting that revised information be submitted via mail.
- Office audit – This type of audit is more intimidating, as it requires the taxpayer to appear at an IRS office, bringing their documentation along with them. These audits are often the result of deductions or credits that are out of the norm, such as an unusually large medical expense deduction for which the agency requires documentation in the form of invoices and payment receipts.
- Field audit – The most intrusive of all audits, a field audit involves IRS agents coming to the taxpayer, usually visiting either their place of business or their home in order to review the tax return in detail.
How to prepare for an audit
Receiving notice of a tax audit will put a stutter in the step of even the most meticulous and upstanding taxpayer, but the nerves set off by the notice can easily be offset with the knowledge that you’ve kept good records and maintained copies of all pertinent documents. If you haven’t been keeping careful records, understand that in the face of an audit, it will be up to you to prove that you deserve whatever deduction you’ve taken, so amend your ways and start keeping well-organized files of all financial statements, invoices, and receipts. Doing so will not only be a substantial help in case of an audit, but it will also be remarkably helpful should you need to assess your business’ health or put together a financial statement for potential investors or when applying for a loan.
If you are uncomfortable with addressing the IRS questions on your own, you have the right to be represented by a professional of your choice. That might be a CPA, an attorney, or an enrolled agent. This person or persons can go with you or for you to any face-to-face meetings. There is no requirement that you attend an audit session unless the IRS specifically requests your presence.
After the audit is over, you will be provided with a report. If you agree with the contents of the report, you can simply sign it or whatever assenting form the auditor provides to you.
The taxpayer bill of rights
You may think yourself at the mercy of the IRS, but Congress enacted a taxpayer bill of rights that specifically outlines the IRS’ tax collecting abilities as well as the protections offered to taxpayers in the face of IRS collections. The taxpayer bill of rights includes:
- Right to be Informed
- Right to Quality Service
- Right to pay no more than the Correct Amount of Tax
- Right to Challenge the IRS’s position and be Heard
- Right to Appeal an IRS’s decision in an Independent Forum
- Right to Finality
- Right to Privacy
- Right to Confidentiality
- Right to Retain Representation
- Right to a Fair and Just system
What if you don’t agree with the audit decision?
Knowing that you have rights is nice, but pushing back against the decision of an IRS examiner can feel challenging. If you’ve complied with all of the examiner’s requests and now find yourself with a Revenue Agent Report that you disagree with, there are specific steps that you can take. You can:
- Ask for an informal conference with the examiner’s manager before the deadline provided within the report.
- Ask for an Appeals conference to occur before the deadline provided within the report.
If you have received a Statutory Notice of Deficiency, you can also file a petition with the tax court.
How to Get Through an Audit
There is no shame in being unnerved by an IRS audit, but there are several ways that you can minimize the stress that you feel.
- Don’t hesitate to request a postponement if you need time to get your documents together.
- Familiarize yourself with your rights
- Be honest
- Discuss your audit strategies with your Authorized Representative, whether that is your CPA, attorney, or another person. That person will respond directly to the assigned IRS agent.
- Don’t try to fake your way through an audit. Have the information that is requested so that you can get through it more quickly.
- Don’t hesitate about reaching out to the auditor if you disagree with the examination report that they have produced.
- Remember that if you are unable to pay a tax liability or disagree with the auditor’s assessment, negotiation is a possibility.
One of the most important decisions you can make in the face of an audit letter is to work with an experienced tax representative who can help you with both your preparations and your response. For information on the assistance we can provide, contact our office today.