In 2017, considerably more than one million taxpayers had their tax returns audited by the Internal Revenue Service (IRS), but this counted for less than 1% of all files.
If you received a dreadful IRS audit notice, keep calm, and realize that the investigation is a professional process that may be handled by simply delivering the proper papers.
Understanding what to expect will help you fix issues quickly, handle numerical disparities, communicate with IRS agents appropriately, and complete the process with only a tiny amount of stress.
Why the IRS May Contact You
Taxpayers should always be mindful that an audit does not imply that unlawful conduct is suspected. Tax filings are complex documents that contain financial information that you must examine for accuracy.
The auditing procedure is referred to as an evaluation, and it does not infer that you have got it wrong on purpose. The IRS contacts individuals for several reasons.
According to the IRS, taxpayers are chosen through some “spontaneous classification and computer screening” procedure based on analyzing the economy. The Internal Revenue Service analyzes tax returns to “norms” for similar returns.
If you have operations with other taxpayers, such as business contacts or shareholders, and they have been questioned, you may be evaluated.
Other indicators, such as revenue reported or odd deductions, are used to select some returns.
Other reasons you may be audited:
- Third-party reports on income on 1099s or W-2s that contradict each other
- Deductions for home offices
- Losses on rental properties
- Use of a vehicle for business purposes
- Deductions for hobbies (also known as hobby losses)
- Bank accounts or foreign currency transactions
Three Types of Audits
There are three sorts of audits, each with a different level of seriousness. According to news sources, most audits are minor, and more than three-quarters of audits are done via mail.
Correspondence (Mail) Audit – Correspondence is frequently used to tackle routine problems such as improper math or missing paperwork.
Office Examination Audit – An office investigation is planned in a local IRS department to determine if you have reported all your earnings and that your deductions are valid.
Field Audit – The most thorough of the three is a field audit. An IRS agent will come to your home, business, or accountant’s office to look over your records and files to ensure that the information on your tax return is valid.
Preparing for an Audit
The IRS will notify you by mail or phone if you are being audited, not via email. The particular facts you will evaluate, and any other papers you may need to bring will be included in the notification.
An audit notice gives you 30 days to reply. Do not put off responding to a letter since the time you wait to respond will add to the amount you owe the IRS in interest.
Before an audit, prepare your papers, figure out the problem, and decide whether you want representation.
- Home mortgage statements are among the documents you may be required to present
- Tax returns from the past
- Receipts
- Statements of Brokerage
- Records of retirement accounts and receipt of payments
You should check your files with a tax professional to understand the discrepancy. If you file your taxes at home using an online filing service or through a tax compilation firm, the firm may charge a fee for audit defense.
During the Appointment: Know Your Rights
You can attend the appointment alone or have a representative attend in your place or beside you. A certified public accountant (CPA), attorney, IRS Enrolled Agent, or paid preparer of your return can represent you; however, it may be costly.
It would help if you were nice and compliant throughout the audit, which will occur in person at an IRS office or at your home. Show just the IRS agent documents that they have requested.
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