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Have you received the dreaded notice that you’re being audited by the Internal Revenue Service? Or worry that the big audit might strike you when you least expect it? If you get audited by the IRS, what happens?
First, don’t panic. There are many reasons for an audit, and in 80% of all cases, this requirement only concerns a minor issue on your tax return. Still, we know it’s a stressful event, and we’re here to give you the information you need to get through the process as painlessly as possible.
- What Is An IRS Audit?
- What Does An Audit Letter Look Like?
- Types Of Audits
- The IRS Audit Process
- What Are Common Audit Triggers (Video)?
- Should I Get Professional Audit Assistance?
- Prevent Tax ID Theft
An IRS audit is an examination of an individual’s or business’s financial information to ensure the information you’ve provided on your tax return is accurate according to tax laws.
An IRS audit letter will arrive in your mail box on official IRS letterhead, and not via phone call or email. It will provide information, not ask for it. Be on the lookout for IRS audit letter scams and always confirm phone numbers and contact information by visiting the official IRS website before calling.
There are three basic types of audits. The IRS will initially notify you by mail if they require an audit.
A correspondence audit is the simplest type and usually involves a minor error or typo on a recent tax return. The IRS will send you a letter requesting more information, such as income, expenses, and itemized deductions (learn more about self-employment tax deductions). In most cases, you can handle a correspondence audit by mail.
An office audit is more complex than a correspondence audit. You’re required to visit an IRS office with all required paperwork. The initial letter you receive will include all contact information and instructions.
A field audit is similar to an office audit, but the IRS visits you either at your home, business or accountant’s office. Again, the letter you receive will give you all the details you need. You may request an office audit in place of a field audit, but there’s no guarantee the IRS will approve your request.
The IRS audit process differs depending on the issues of your audit. But in every case, it’s important to know your rights as a taxpayer to ensure the IRS handles the process properly. The following frequently asked questions and answers will help you better understand the general IRS audit procedure.
The IRS typically will grant a one-time, 30-day extension for a correspondence audit. For office or field audits, you’re required to make an appointment, which is usually within two to three weeks. You can, however, contact the auditor assigned to your case to request an extension.
The IRS will provide you a written request detailing the specific documents they want to see. These, of course, will differ depending on the audit issues. They prefer hard copies but will accept some electronic records generated by tax software. Contact your auditor to determine what they’ll accept. Here’s a listing of records the IRS may request:
- Bank statements
- Proof of income
- Legal papers
- Loan agreements
- Business travel logs and tickets
- Investment statements
- Bills, receipts, and other expenses
Note: The law requires you to keep all records you used to prepare your tax returns for at least 3 years from the date you filed your original return. We recommend you keep them for 7 years in case you need to file a claim for a loss from worthless securities or a bad debt deduction.
On average, the audit process takes about a month from the time you receive your initial letter to the close of your case. But the length varies depending on the type of audit, the complexity of the issues, the availability of parties for scheduling meetings, and whether you disagree with the findings.
In most cases, the IRS will adjust your tax return, and you pay the tax due plus interest. Reasons for adjustments can include errors you made, the removal of deductions you claimed but can’t prove or income you didn’t include in your return. But if the IRS determines your issues too severe or felt you weren’t cooperative during the process, they can hit you with a 20% accuracy-related penalty.
Although the chances of an audit are quite small, you should be aware of IRS red flags — more common areas or issues on tax returns that could draw more attention. Check out this video by Bloomberg that explains the top 6 red flags.
Getting audited is one of the most stressful experiences you can go through, and you might find it helpful to have someone on your side. Many people facing office or field audits hire a tax professional to represent them. This tax pro must be a certified public accountant (CPA), attorney or enrolled agent. But keep in mind, their fees could rack up quickly.
Another option is to be proactive when you file your tax returns. There are several reputable services that can serve as your advocate in the event you get audited. These services are much less expensive than going with an attorney or CPA; however, they don’t provide in-person assistance during your scheduled audit meeting. What they do offer is an expert evaluation of your audit letter, guidance about what documents you should provide and help to organize your documents in a clear, concise manner to present to the IRS. See our top online tax services all provide some sort of audit defense.
Although being audited is nerve wracking, it’s crucial to keep a level head during the IRS audit process. You’re not helping yourself if you appear uncooperative, reluctant or get irritated with your assigned auditor. Remember, while there are rules to protect you, an auditor does have some discretion about the IRS penalties they impose on you.
Potentially more important than an audit, is making sure you don’t suffer from tax identity theft. Checkout our top 5 tips on tax ID theft prevention.
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