An IRS audit can be an anxiety-producing event. One factor that makes the idea of being audited by the IRS so intimidating is uncertainty, as the average taxpayer isn’t very experienced in dealing with the IRS. What’s more, it can feel like the IRS holds all the cards when it comes to what you must do next. 

It is important to understand what happens when you get audited by the IRS. Let’s take a look at what may be in front of you.

What Is an IRS Audit?

An audit occurs when the IRS takes a deeper look at the information on your tax return. This may be as simple as the IRS requesting some documentation regarding a figure or calculation. However, it could turn into a full-scale investigation that stretches back many years into your tax history. 

That 30-Day Window

You have 30 days to respond to a notice from the IRS if you disagree with what is written on the audit letter you receive. You are responsible for responding with any documentation or proof that could support your position. It often takes the IRS 30 days to respond to response letters.

Reasons Why You Might Be Audited by the IRS

It is entirely possible to be selected at random by the IRS. However, almost all audits result from red flags that are highlighted using the IRS’s special software, which spots errors or suspicious items on tax returns. 

Here are the factors that often trigger audits:

• Math or data entry errors

• Unreported or underreported income

• Unusual or excessive deductions

• Erroneous claims for dependents

• Incorrect filing status

• Affiliations with people or entities currently being audited

• Discrepancies of any kind

Self-employed people are at higher risk for audits. What’s more, businesses that report losses for several consecutive years have a harder time flying under the radar of the IRS. Of course, receiving a letter from the IRS doesn’t mean that you’ve intentionally done something wrong. 

Knowing how to respond and move forward when facing an audit can make all the difference! The big thing you should never do is ignore an audit letter. Ignoring a letter is essentially agreeing to waive all your rights. The IRS will have the ability to make changes to your return, impose taxes and penalties, and begin collecting anything that you owe using any and all legal means available if you fail to respond.

The Steps of an IRS Audit

What happens when you get audited by the IRS? An audit starts with that infamous letter that arrives in your mailbox. However, not everyone will have the same audit experience, as the IRS conducts three different types of audits. Here’s a look at them:

Mail Audits

The majority of IRS audits are mail audits, or letter audits. The IRS uses mail audits to request proof regarding specific items on returns. You will receive a letter from the IRS identifying the specific issue in question; you may also receive a form for you to fill out with your reply. You will have 30 days to respond with documentation of your position, such as receipts, invoices, and so on. Assuming the IRS accepts your position, most mail audits are over within a few weeks. 

Office Audits

Office audits typically involve more than one portion of your tax return. You’ll receive a letter outlining what is under review along with a request from the IRS for a face-to-face meeting. It is highly recommended that you utilize the help of a qualified tax professional before your appointment with the IRS to ensure all of your rights and options are explored. Before your appointment, gather all the necessary documentation, including any electronic bookkeeping records. Consult with your tax professional and make sure you only bring  what you need to document your position. During the office interview, answer any questions directly and succinctly. Do not provide the auditor with more information than is absolutely necessary. The good news is that most office audits wrap up within three to six months. 

Field Audits

A field audit is a serious, comprehensive audit. Your home or office may even be visited during the audit. Before the IRS agent shows up, make sure you have your books and receipts ready and organized for their review. It’s critical to have a good representative working on your behalf if you’re facing a field audit. As with an office audit, answer any questions as succinctly as possible. Make sure your tax professional is with you during the field audit and feel free to consult with or refer to them if you are unsure of how to answer. Many field audits can take up to a year, but you can speed this along by hiring professional help and responding quickly to all requests from the IRS. 

The one thing that all audits have in common is that the IRS is looking for documentation and paper trails. In fact, coming up with documentation to submit to the IRS will make up the bulk of your role in an audit. The IRS typically completes an audit within a few weeks or months. However, the IRS technically has up to three years to conduct an audit.

How Is an IRS Audit Concluded?

There are three ways that an IRS audit can end. The IRS may find that no change is necessary. This means that you have satisfied the IRS’s attempt to substantiate every item that was placed under review. The IRS can also propose changes based on any inaccuracies or discrepancies that are found. You have the option to accept or contest any proposed changes. You will be asked to sign an agreement form if you do agree. However, this may require you to pay money that is owed. You also have the option to disagree with any proposed changes. It will then be necessary to take action by requesting a meeting with an IRS manager or appeals officer. You can also file an appeal via a formal written protest. This is where working with a tax professional is going to be extremely important.

What should you do following an IRS audit? This is a period that will be really important for exploring the options for appeal that are available to you if you disagree with the verdict of the IRS’s audit. You may still have work to do if you agree with the changes that are proposed. It is likely that proposed changes from the IRS could leave you owing money. That means you may need to explore options for payment plans or exemptions that will help you to avoid penalties.

Are You Facing an IRS Audit?

That critical window for responding to an audit notice can shape the audit process. The Tax Group Center is here to provide support and representation from the start. We have a team of certified tax consultants, tax attorneys, CPAs, and enrolled agents who deal with the IRS on a daily basis. We understand the blueprints of an audit. Our 30 years of experience and passion for helping our clients find the best solutions possible make us a top choice among people facing audits.

The IRS frequently earns “bad guy” status in the eyes of the public, but it does provide a path to a fresh start if you’ve hit some bumps. What’s more, you can and should take advantage of this option once you gain access to the tools and guidance you need to move forward. If you’re struggling to pay what you owe, take a look at the IRS Fresh Start initiative.

What Is the IRS Fresh Start Initiative?

The IRS Fresh Start initiative is a program that can help you avoid falling deep into debt to pay off owed taxes. Keep in mind that the Fresh Start initiative is not necessarily a single program that offers a one-sized solution; rather, it’s a collection of options that have been added to the tax code to aid taxpayers who are drowning in owed taxes and penalties. This means a fresh start could be an option for you even if you haven’t paid taxes in years.

How Does the Fresh Start Initiative Work?

The IRS Fresh Start initiative works by providing taxpayers with options for paying overwhelming tax debt without falling further into the debt hole. Many of the worst repercussions of not paying the IRS on time can be taken off the table once you fill out an application. The Fresh Start initiative can put you on the same side as the IRS instead of trying to hide from them. 

Having a “fresh start” payment plan approved can take anywhere from one to 12 months, and the IRS can nullify its agreement with you at any point if you fail to make promised payments. Keep in mind that changes to the tax code may impact your agreement with the IRS in the future. These are just some of the reasons why having a tax representative helping you along the way is so critical to successfully utilizing the IRS Fresh Start initiative.

Who Qualifies for the Fresh Start Initiative?

Anyone who owes a tax debt of $50,000 or less could be qualified to participate in the Fresh Start program. Self-employed individuals need to show that they’ve seen their net income drop by at least 25 percent to qualify for this program. Single filers need to earn less than $100,000 per year to qualify. A married couple filing jointly needs to earn less than $200,000 annually to qualify. Here’s what else you need to know:

• You must first file all back and current tax returns before applying
  
• Repayment options cannot be requested if you have yet to file outstanding returns
  
• You must be willing to file future returns on time in order to retain your status

It is a smart idea to have a tax professional look over your situation and provide assistance before you begin filling out forms, as determining your qualifications can be a complex process. What’s more, you want to make sure that you sign up for the type of forgiveness or repayment plan offered through Fresh Start that serves your interests.

Can You Negotiate IRS Debt?

It is often possible to negotiate IRS debt if you fall into a qualifying category. The Fresh Start program was designed precisely to allow this for certain taxpayers. However, you still have other options if you cannot negotiate down the amount of debt you owe. The IRS may still grant you an option for repaying the full amount owed overtime. Entering into a plan with the IRS can also shield you from harsh penalties.

What Are the Fresh Start Repayment Options?

People who participate in the program can choose one of three repayment options. The most common option is an extended installment agreement. This setup grants you up to six years to pay off taxes that are owed without incurring any penalties or interest. You will also be protected from IRS actions like liens, asset seizures, and wage garnishments. The IRS will determine the size of your payments each month based on the income and assets you have at your disposal. Monthly payment amounts are designed to be reasonable and realistic. Both long-term and short-term payment options are available. This is often the most desirable arrangement.

A second option is called an Offer in Compromise (OIC). An OIC makes it possible for you to make an offer to settle the tax debt that you owe to the IRS for less than you owe. The offer can often be substantially lower than your actual tax debt. However, there is an art to making a reasonable offer that is likely to be accepted by the IRS.

The last option is something called a tax lien withdrawal. This repayment option requires you to pay off your full debt total using direct payments. You will need to draw up a plan to have the tax lien taken from your account each month.

Do You Want to Learn More About the IRS Fresh Start Program?

The IRS Fresh Start initiative is not simple; in fact, trying to work through such a nuanced program on your own could cause you to miss opportunities or make less than ideal decisions. Tax Group Center’s team of licensed, caring tax professionals will work to ensure that you can squeeze the full potential out of what is offered from this program. We’ll go through all of the steps and options that are involved on a one-on-one basis. 

It’s not every day that the IRS volunteers to help people with tax debt. Don’t miss your shot to clear up a big problem! We can also help you with filing your taxes on time to ensure that your acceptance into the program is never nullified. Reach out today to explore this option with an industry-leading team backed by 30 years of experience.

It’s never a good day for an Internal Revenue Service (IRS) audit, and it’s normal to feel nervous if a letter arrives from the IRS. However, there are two important things to know if you have audits on your mind. The first is that you do have options to help you avoid fines and penalties if you are audited. The second is that you may be able to avoid an audit in the first place if you know about the common IRS audit triggers. 

What Is an IRS Audit?

An IRS audit is a review or examination of the accounts and financial information of an individual or organization that is conducted to ensure that all reported tax information is correct. The first step the IRS takes is to ask for additional information or clarification regarding an item on a tax return. What happens next depends on what sparked your audit, the type of documentation you provide, and the determination that’s made by the IRS agent assigned to your case.

Why You Need to Be on the Lookout for Common Audit Triggers

The big thing to know is that the IRS doesn’t select the tax returns that are to be audited by hand. Additionally, only a very small number of tax returns are actually chosen for audits at random. The IRS relies on a computer system to highlight returns that contain errors or suspicious numbers, or otherwise raise questions. The bottom line is that you aren’t going to be able to outsmart a computer system. This is why knowing exactly what will cause the IRS’s computer system to single out your return is so important.

The Nine Common IRS Audit Triggers

The good news is that you’ll probably be in the clear if you make less than $200,000 annually. In fact, less than one percent of all IRS audits are done on returns that claim incomes of less than $200,000. Of course, that doesn’t mean that you’ll totally avoid the radar of the IRS if you don’t have a huge income. Keep reading to learn about the nine notorious audit triggers.

Math Errors

Unfortunately, making a simple math mistake can get the IRS on your back. The IRS uses programs that review math calculations on tax returns, and any numbers that don’t quite add up the way they should can be flagged for review. Even something as simple as a Social Security number that’s off by a digit can trigger an audit. Take your time, be precise with your math, and have someone else check your numbers before you submit your return.

Round Numbers

Does it seem like all of the numbers on your tax return are ending in zeros? The IRS probably isn’t going to like that. Numbers that seem too rounded can trigger an audit because it looks like you’re trying too hard to make everything add up nicely.

Unreported or Underreported Income

The IRS receives copies of your W-2s and 1099s each year, and it has a system that automatically compares the earning data it receives against what you report on your tax return. Any discrepancies are likely to trigger an audit. It is extremely important to have any errors that you spot on your 1099 addressed and corrected before you file your taxes!

High Incomes

Did you have a windfall year? The IRS may want to know more about it! A high income can increase your odds of being audited. In fact, about half of all of the audits that take place each year involve people who earn more than $1 million.

The Home Office Deduction

Few things excite entrepreneurs as much as the home office deduction. However, taking advantage of this tax perk could potentially pique the interest of the IRS and increase your odds of being audited. That’s why it’s so important to make sure all expenses related to your home office are properly documented. Keep in mind that having a television or dining table in your designated office area could make it hard to prove that you’re following the rules.

Claiming a Business Vehicle

Does your tax filing show that you use a specific vehicle for business 100 percent of the time? Unfortunately, the IRS doesn’t always buy this claim. The IRS knows that it’s pretty rare for someone to use a vehicle exclusively for business purposes. What’s more, not having another vehicle registered to your name can really raise some red flags. The solution is to keep very detailed records to prove that you’re using your business vehicle exactly the way you claim.

Excessive Deductions

A return that features lots of deductions could attract the eye of the IRS. This doesn’t mean you should avoid honest, valid deductions – you just need to be extra vigilant to ensure any deductions you take are truly connected to your business. A qualifying purchase should be common, accepted, and useful in whatever industry you operate in professionally.

Filing a Schedule C

You may have to file a Schedule C if you own a small business. Unfortunately, this could put you in the hot seat. Be smart about maintaining proper documentation for every claim if you’re filing a Schedule C.

Losing Money

A business that loses money consistently could raise suspicions. The IRS knows that some people try to write off money that is spent on hobbies by claiming that the costs are related to a business. The IRS may verify that your business really is a business if you seem to lose money every year.

What Should You Do If You Are Audited?

What happens when that audit letter from the IRS arrives in your mailbox? Don’t ignore it – this is a problem that won’t go away on its own. You may be asked to answer questions or schedule a visit from a field auditor. 

Whether you’re facing a field audit or an in-office interview, don’t handle it alone. You should bring a CPA to help you. If you don’t have a CPA, it’s time to get one. Before the interview or field audit, consult with your CPA to help you gather and make copies of all the documents you will need. 

You may be wondering just how much you have to comply with what is requested, or if there’s a way to appeal your audit. The truth is that the audit process is complicated, and you risk penalties, fines, and other negative consequences when an IRS audit takes you by surprise. 

Tax Group Center is here to make sure you don’t have to go up against a big agency all by yourself. We work directly with the IRS to save you hours of stress because we speak the language of the IRS. Our team of tax professionals has already helped thousands of people handle tax issues. Call us today to receive expert advice for handling your IRS situation.

Nobody wakes up in the morning hoping that a notification letter from the Internal Revenue Service (IRS) is waiting in the mailbox. However, the reality is that IRS data shows that close to one million Americans are subjected to tax examinations each year. The good news is that understanding how the audit process works can help people avoid audit triggers, understand their rights, and respond properly if and when audits do happen. Take a look at what every taxpayer needs to know about IRS audits.

What Is an IRS Audit and Why Is Someone Typically Selected?

The IRS has the right to audit the tax returns filed by all businesses and individuals. An audit is a closer examination of a tax return that has been filed, though it is not an indictment of any kind regarding the accuracy or legitimacy of that tax return. You don’t have to be a millionaire, mogul, or a high-profile person to be the subject of a tax audit.

Of course, most people will breeze through life without ever receiving a notice for an audit. Others are not so lucky and may even end up owing the government money. What could potentially trigger an audit for a specific person or business? Several factors are in play when it comes to how and when IRS audits are triggered.

The IRS uses “red flags” that are spotted on tax returns to decide which returns will be audited each year. This means that anything that appears to fall outside of the ordinary could trigger an audit. For instance, a return that shows a low-income level with high deductions could result in an audit notice. 

Here are some common factors that trigger audits each year:

•     Math mistakes
      
•     Numbers that appear too “neat” or “round” throughout a return
      
•     Unreported income
      
•     Early withdrawals from retirement funds
      
•     Higher than normal charitable deductions
      
•     Higher than normal work-related deductions
      
•     Broken rules for foreign accounts
      
•     Incomes higher than $200,000
      
•     An unusual number of dependents
      
•     Overlapping tax associations with people or businesses that have been audited
  
  

Owning a small business or shares in a limited partnership can also increase a person’s odds of being audited. 

Keep in mind that the IRS doesn’t scan tax returns by hand to spot oddities; instead, it uses a computer system designed to spot areas of concern on returns. This system is called the Discriminant Information Function (DIF). Nobody is safe from the DIF – every single return received by the IRS is scanned through it. In addition to scanning information, the DIF is capable of comparing returns from different taxpayers to pinpoint inconsistencies.

How Are You Notified of an IRS Audit After You File Your Taxes?

The IRS notifies taxpayers of audits exclusively by mail. This means that any notification you receive by phone or email is probably part of a scam. An IRS notification letter typically asks the recipient to answer specific questions or explain the details of a tax return. Here are some characteristics of a genuine audit letter from the IRS:

•     It arrives via certified mail
      
•     It contains the taxpayer’s correct name
      
•     It contains the taxpayer’s taxpayer number
      
•     It contains an employee number
      
•     It has a form number
      
•     It provides contact information that a taxpayer can use to reply to the IRS
  
  

Remember that an IRS representative will never demand instant payment of owed taxes, and that a request like that could be a sign of a scam. Every taxpayer has the right to receive courteous treatment from IRS agents. In addition, taxpayers have a right to know why the IRS is asking for information, how that information will be used, and what the consequences will be if a taxpayer refuses to provide information.

What Is the Audit Timeline?

The specific timeline of an audit will depend on numerous factors. Agency backlogs, appeals, and the complexity of a particular audit all play roles in determining the length of the audit process. The life cycle of an audit is rarely more than a few weeks, but the IRS technically has up to three years to complete a full audit. 

Quickly answering all correspondence from the IRS can help ensure that the audit process does not get drawn out. Interest can continue to add up during the length of an audit if a taxpayer has a delinquent tax. In short, longer audits can cost extra money for people who owe taxes.

It is important to know that tax audits are not exclusively conducted for just the previous year. Audits are typically triggered within two years of a return being filed, but the IRS can go as far back as six years when pulling tax returns for auditing purposes.

How Is an IRS Audit Conducted?

The IRS uses several methods to conduct audits. Some people who are audited go through correspondence audits. This means that all forms, supporting documents, and necessary payments are exchanged through the mail, and no in-person meeting is required.

However, the IRS may decide to conduct an audit through an office or field audit. An office audit requires the person being audited to meet with an IRS representative in person at the nearest IRS office for an interview that typically involves answering questions and providing supporting documentation. A field audit means that an IRS agent will visit the person being audited at their home or place of business. 

What are the major differences between a correspondence audit and an office or field audit? A correspondence audit typically focuses on one specific error or issue within a tax filing. An in-person audit, however, occurs when the IRS has a number of questions regarding what is contained within a tax return. The in-person interview scheduled during an office audit is often used as a time for agents to gather supporting documentation and clarify questions about the filing. The general recommendation is that a person should not attend an audit interview without an authorized tax representative to provide support. A field audit, on the other hand, will involve an IRS agent coming to the audited person’s home or place of business, or wherever the relevant records are kept. Field audits are usually conducted when the IRS suspects fraud or has more serious questions about the legitimacy of a tax filing and must gather on-the-ground information. 

How Do You Avoid Getting Audited by the IRS?

The fact of the matter is that it’s impossible to be fully inoculated against IRS audits. A small percentage of audits are done totally at random. However, most audits are triggered by “red flags” that can be avoided. The easiest way to avoid an IRS audit is simply to file honest, accurate returns. Don’t forget that simple mistakes like incorrect calculations or failing to sign a return can increase the odds of an audit.

If you think your tax return may contain some of the red flags that trigger audits, it’s wise to get ahead of the problem. You can and should provide explanations for any details that could look problematic. Including receipts with a return is a smart way to provide documentation. You can also submit extra forms and worksheets with a return to clarify why some numbers look the way they do.