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:
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 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.
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.