The mere mention of ‘audit’ dreads many people. This is perfectly understandable given the intimidating picture IRS audits are projected in the mainstream media.
Also, in itself, the circumstances and penalties you may face if the audit indeed proves discrepancies are fearful.
When you receive one, you ask straight away if you’re going to jail. Some even ask, “do I need a tax attorney for an IRS audit?” Don’t worry, for these types of scenarios are extremely rare. Not every Internal Revenue Service (IRS) tax audit notice implies you’ve broken the law.
What instances call for an IRS tax audit
An IRS tax audit is a process where an organization or an individual taxpayer’s account and financial information are reviewed to ensure tax law compliance. The IRS usually chooses taxpayers to audit at random. As long as you are confident your returns are sufficient and well-supported, then there is nothing to fear.
However, some mistakes will more likely drive you in for an IRS tax audit. Among these are:
- Incorrect math or mathematical omissions
- Rounded up numbers in reports
- Failure to report all income
- Home office deduction claims
- Unusually high business costs
- Claims on large charitable donations
Preparing for an IRS audit
IRS notifies taxpayers either by phone or mail, but never through email. The notice you’ll receive will include when and how to present the requested documents. Depending on the complexity of the case, the audit is done in three ways: through the mail (correspondence audit), in an IRS office (office examination audit), or in person at your home or business place (field audit).
To prepare for the audit, you first need to stay calm. There’s no reason to panic if you have nothing to hide. Process the situation and try to understand its severity. Research information on the process of IRS audits and, if you must, seek tax professionals to help or represent you.
Then, waste no time and prepare the requested paperwork. Retrieve copies of your tax returns and other related documents from the past three to ten years, just in case. Organize them by years and types of revenue they represent.
Refrain from mailing the original records and prepare as many copies as possible. Make sure only to send the forms requested by the IRS. Be careful not to provide documents that are beyond the point of discussion. Volunteering more information than requested might only lead to additional questions and a longer, more complex process.
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What happens during the audit
IRS agents have a reputation of being intimidating. Even so, maintain politeness and be cooperative. Be prepared to answer questions concerning bank statements, receipts, bills, and even the activities you did that year. Only respond to the questions asked.
As a taxpayer, if you believe you’re receiving unfair treatment, know that you have the right to courteous treatment and confidentiality during the audit process.
What happens after the audit
Depending on the severity of the case and how quickly you respond to the requests of the IRS, the auditing process could take weeks, months, or in worst-case scenarios, years. Consequently, the audit results could end in three scenarios.
First, there will be no changes in your returns. This means your documents or evidence have successfully supported no errors or discrepancies in your returns.
Second, you agree upon the changes or adjustments the IRS agent proposes in your returns. A post-audit report containing the adjustment such as additional taxes will be presented, and you will have to sign it.
The last one is when you disagree with the audit findings and refuse to sign them. If this happens, you may request to review the report with an IRS supervisor. Since you refused to sign, you also have the right to appeal the case in court.
Takeaway
As you know by now, the audit process does not always have to be lengthy and costly. Tax professionals and law firms are always accessible for consultation and assistance. And, most of the time, all it takes is proper preparation.
In reality, only a tiny percentage of tax returns are subject to audit. Still, there’s no surefire technique to avoid an audit altogether. However, if you submit the truth and nothing but the whole truth, you need not dread getting a letter from the IRS questioning your tax returns.