IRS Auditing Explained
An audit from the Internal Revenue Service (IRS) can be a substantial interruption to your life. The complexities of tax law are not a concern for most people, but once that audit notice is received, you have a responsibility to the IRS and to yourself to respond appropriately. There’s no need to panic—in this article, we will shed light on the enigmatic process of an IRS audit, while equipping you with the knowledge you need to prepare yourself for it.
What is an IRS Audit?
An IRS audit is like an unsolicited performance review. It’s an examination of your tax return and financial records to ensure they accurately reflect your income, deductions, and credits. Think of it as the tax version of “show me the receipts.” The IRS is essentially saying, “Hey, buddy, let’s take a closer look at your financial affairs and make sure everything is on the up and up.”
Why Would You Be Audited?
There’s no exact science to determine who gets audited, but certain red flags can increase your chances. Here are some reasons why the IRS might give your tax return a second look:
- Random Selection: Yes, it’s like being chosen for a spontaneous game show—lucky you! The IRS occasionally selects tax returns at random for audit, just to keep everyone on their toes.
- Discrepancies: If your numbers don’t add up or there are inconsistencies in your return, it’s like having a big neon sign that says, “Come audit me!”
- High-Income Individuals: The IRS loves rubbing elbows with the wealthy. If you’re in the upper-income bracket, your chances of being audited may increase, as the potential tax liabilities are higher.
- Business Ventures and Self-Employment: Self-employed individuals and small business owners may attract more attention due to the complex nature of their income and expenses. So, if you’re a one-person circus, the IRS may want a front-row seat.
- Suspicious Deductions and Excessive Generosity: Claiming unusually high deductions or making charitable contributions that seem out of proportion to your income might raise a few eyebrows. The IRS wants to make sure you’re not turning tax returns into creative writing assignments.
Now that we know the “what” and “why,” let’s dive into the thrilling world of what actually takes place during an IRS audit.
The Audit Process Unveiled
The Notice: The audit journey begins with an official notice from the IRS. It will outline the specific items being audited and provide instructions on what to do next.
Your First Steps: Your first line of defense should be to prepare all relevant financial documents for review. The IRS will request documents such as bank statements, receipts, invoices, and anything else relevant to the items under scrutiny. Remember, the more organized, the better.
Audits can be conducted in three ways
- Field Audit: This is an in-person audit conducted at your home, place of business, or perhaps your accountant’s office. The IRS agent will review your records and potentially interview you or your representative.
- Office Audit: A slightly less nerve-wracking option, the office audit requires you to bring your records to an IRS office. The agent will examine your documents and clarify any uncertainties, ask relevant questions, and, hopefully, help you resolve the tax issue at hand.
- Correspondence Audit: The least invasive of the three, a correspondence audit is conducted via mail. The IRS will request specific documents or information, and you’ll have to respond within the given timeframe. For this type of audit, it is crucial that you respect the deadlines given, otherwise, you may include further penalties.
During the audit, it’s crucial to present your case in the best possible light. Be prepared to provide explanations, justifications, and supporting documents for the items in question. It is essential that you remain as truthful as possible during these interactions. Nothing can be gained from attempting to mislead the IRS.
After the agent has finished their investigation, you’ll receive an audit report summarizing their findings. If discrepancies are identified, you may owe additional taxes, penalties, or interest. Keep in mind that you have the right to appeal the decision if you disagree with the outcome, so the result is not necessarily set in stone.
A Qualified Tax Attorney is Essential
At every step along the auditing process, having a qualified tax professional at your side could drastically alter the outcome of the IRS’ review. As we stated at the onset of the article, most of us are not experts in the complexities of tax law. That fact is specifically why tax debt lawyers, who have dedicated their careers to representing people with tax debt issues, are instrumental to your success during an IRS audit.