An audit notification from the IRS scares many people. But knowing how the process works can reduce some of the stress involved
In summary, an IRS audit is a review of an organization’s or individual’s accounts and financial information to ensure that information is correctly reported according to the tax laws. Although the prospect of an audit sounds intimidating, it’s important to remember that IRS audits are rare. They can be conducted by mail, at an IRS office, or in person at your home or business; most audits are done by mail with face-to-face audits being uncommon. If selected for an audit, relax and do not panic. It’s critical that you review your records in detail and prepare for the audit interview (if needed). Also remember that audit findings are not final, you have the right to appeal.
Why was I selected for an audit?
IRS audits usually aren’t random. The IRS uses computer screening to compare tax returns against “norms” for similar returns. They select returns that are the most likely to have errors based on complex criteria. The IRS may also select your return when they involve issues or transactions with other taxpayers (such as business partners or investors) whose returns were also selected for audit. After you file a return, the IRS usually has three years from that point to start and finish an audit. It’s important to keep any records related to your tax returns for this reason.
Please note that filing an amended return does not automatically affect the selection process of the original return but amended returns do go through a screening process. Contrary to popular belief, a refund does not necessarily trigger an audit.
How will I be notified?
If you or your business is selected for audit, the IRS will notify you by mail. Don’t fall for phone or email scams that claim that you owe the government money; the IRS will never initiate an audit by telephone or by email.
How will the audit be conducted?
You will be contacted initially by mail and the letter you receive will provide all contact information and instructions. The IRS manages audits either by mail or through an in-person interview to review your records. The interview may be at an IRS office (office audit) or at the taxpayer’s home, place of business, or accountant’s office (field audit). Never try to handle an audit by yourself, seek the help of a tax professional experienced and knowledgeable in this area. Once hired, allow your tax professional to meet and discuss all matters on your behalf.
How long does an audit take?
The length varies depending on the type of audit, the complexity of the issues, the availability of information requested, the availability of both parties for scheduling meetings, and your agreement or disagreement with the findings. The more organized you are, the quicker the process.
What do I need to provide?
If you’re being audited by mail, your letter will request additional information about certain items shown on the tax return such as income, expenses, and itemized deductions. Examples of records that the IRS may request include:
- Cancelled checks
- Legal papers
- Loan agreements
- Theft or loss documents
- Employment documents
- Schedule K-1
The IRS accepts some electronic records that are produced by tax software. The IRS may request those in lieu of or in addition to other types of records. If you have too many books or records to mail, you can request a face-to-face audit. The IRS will provide contact information and instructions in the letter you receive.
What do I need to do?
1. First, it’s important to understand the scope of the tax audit. Mail audits are limited to a few items on the letter you received from the IRS. Office and field audits require more work; you’ll need to gather the information/documents that the IRS is requesting and prepare to answer in-depth questions about your finances and activities. When it comes to audits of any type, unless you are adept at IRS procedures, it’s highly recommended that you get a licensed tax professional to represent you and advocate your tax return positions before the IRS. I cannot stress this point enough.
2. Prepare your responses to IRS questions. For a mail audit, prepare a complete response to the items the IRS is questioning in the letter/document you received. For office and field audits, prepare for the meeting with the IRS officer or agent. Gather all the information the IRS has requested and prepare to present it to the IRS. Also, be ready for questions from the IRS, such as those concerning unexplained bank deposits or additional income. The IRS agent will also ask about your job, family, and any outside businesses. Essentially, you’ll need to be prepared to give an account of your entire year’s activities. Answer only what is asked of you, never volunteer additional information or elaborate beyond your answers. This tends to open up additional questioning.
3. Respond to IRS requests for information/documents on time and support your tax return positions. If the IRS thinks there is an adjustment to your return, they will start asking more questions. You’ll get an Information Document Request, which you’ll need to fully respond to by the deadline. For instance, the IRS may disagree with you, stating that you took a deduction that wasn’t allowed or that you should have reported more income on your return. If you disagree, present your interpretation of the facts and tax law to the IRS.
Once the tax audit is closed, the IRS will either propose no changes or propose adjustments to your return. You’ll get a report of the IRS findings and a letter that allows you 30 days to appeal if you disagree (called the 30-day letter).
4. If you disagree with the results, appeal to the appropriate venue. Within 30 days, you can request an appeal with the IRS Office of Appeals. After 30 days, the IRS will send you a letter, called a Statutory Notice of Deficiency. This letter closes the tax audit and allows you to petition the U.S. Tax Court.
For mail audits, the letter proposing adjustments also serves as a 30-day letter. Taxpayers commonly overlook this letter and lose their ability to appeal the audit findings within the IRS.
What if I need more time to respond?
For audits conducted by mail, fax your written request to the number shown on the IRS letter you received. If you are unable to submit the request by fax, mail your request to the address shown on the IRS letter. For audits conducted by in-person interview, contact the auditor assigned to your audit to request an extension. If necessary, you may contact the auditor’s group manager.
How far back can the IRS go to audit my return?
In general, the IRS can include returns filed within the last three years in an audit. If they identify a substantial error, they may go back additional years although not more than the last six years.
What are my rights?
As a taxpayer, you have the following rights:
- A right to professional and courteous treatment by IRS employees.
- A right to privacy and confidentiality about tax matters.
- A right to know why the IRS is asking for information, how the IRS will use it, and what will happen if the requested information is not provided.
- A right to representation, by oneself or an authorized representative.
- A right to appeal disagreements, both within the IRS and before the courts.
How does the IRS conclude an audit?
An audit can be concluded in three ways:
- No change: an audit in which you have substantiated all of the items being reviewed and results in no changes.
- Agreed: an audit where the IRS proposed changes and you understand and agree with the changes.
- Disagreed: an audit where the IRS has proposed changes and you understand but disagree with the changes.
If you agree with the audit findings, you will be asked to sign the examination report or a similar form depending upon the type of audit conducted. If you owe money, there are several payment options available. If you disagree with the audit findings, you can request a conference with an IRS manager. The IRS also offers mediation, or you can file an appeal if there is enough time remaining on the statute of limitations.
Although initially imposing, remember that you do not have to go through the audit process alone. Having an experienced tax professional help and represent you can remove much of the stress and uncertainty around the audit process. If you find yourself the subject of an IRS audit, contact us to learn how we can help.