The IRS conducts over a million tax audits every year. An audit is a process the IRS uses to determine whether an individual or business has paid the correct amount of income taxes. An audit can even reveal if a taxpayer was overpaid in a tax year, however, it’s rare that an audit results in the IRS owing the taxpayer money.
Because of the time and resources involved, the IRS tries its best to focus on auditing only those tax returns where there is a good chance that the taxpayer will end up owing more money. In general, an audit takes a closer look at a tax return to make sure that all income is correctly reported and the deduction claims are real and valid. IRS auditors will require written proof to back up claims made on tax returns, that’s why it’s so important to keep your receipts and proof of purchases.
In this guide you’ll learn about:
- What triggers an IRS audit
- The different types of audits
- The IRS audit process
- Tips for surviving an IRS audit
What Triggers an IRS Audit
The vast majority of tax returns will never be audited. Most people will go their entire lives never receiving an audit. However, the IRS audits between one and two million taxpayers every year. The good news is the people the IRS chooses to audit are not randomly chosen. If you know what they’re looking for you can take steps to avoid audits.
There are several methods the IRS uses to decide which tax returns will receive an audit.
Computer Analysis
Because of the millions of tax audits the IRS has conducted over the years they can use computer power to zero in on the best candidates for an audit. The software they use analyzes past audit results to identify patterns, trends, and common features of tax returns worth auditing. A computer program called the Discriminate Function System uses the data to analyze each new return. Each return receives a score and the higher the score the more likely it is that an audit will pay off for the IRS.
Tips and Referrals
Sometimes the IRS receives tips from people who suspect someone they know is underpaying their taxes. IRS auditors themselves sometimes refer other individuals or businesses for an audit. While examining paperwork in an audit they may discover information that suggests a related person or business should also be audited.
Reporting Institutions
Employers, banks, and investment institutions are required to report money paid to or earned by their employees and clients. If they report something that is different from what is on a taxpayer’s tax return this is another trigger for an audit.
Types of IRS Audits
Not all IRS audits are the same.
IRS audits are typically classified into three categories.
Correspondence Audits
In a correspondence audit you’ll never meet the IRS agent face-to-face. Instead, the audit is performed through the mail or by phone. The auditor may request specific paperwork through the mail, or call the taxpayer to answer questions about the return. This is the most simple and painless form of an IRS audit.
Office Audits
The next step after a correspondence audit is the office audit. In this case, the audit will take place at an IRS Area Office. It may require the taxpayer (or a representative) to meet with the IRS agent at the agent’s office. The type of audit is more common for businesses and more complex tax returns.
Field Audits
A field audit is the most involved of all IRS audits. In this case, the IRS agent goes out “into the field” and comes to your home or place of business. These audits are extremely detailed and intrusive. They’re handled by the most experienced IRS revenue agents. At times they’ll even bring along specialists who are experts in specific technical details.
The IRS Audit Process
The audit process mostly consists of the IRS gathering information to verify your tax returns. Under any kind of audit, you’ll be asked to provide information, in the form of written records, to support or clarify claims made on your tax returns.
The written records an auditor may ask for include:
- Receipts
To provide proof for purchases that are claimed as tax deductions.
- Invoices
For work that you paid for, or that somebody paid you for.
- Accounting Ledgers
Related to your business.
- Tax Returns
For years other than the one being audited or from other people or businesses related to the tax return in question.
Audit Ruling & Appeals
After completing the audit the IRS agent will make a ruling. In some cases the ruling may be that there is nothing wrong with the original tax return. If the agent decides that the tax return does need to be adjusted they will fill out a form or write a report detailing what changes need to be made and how much additional taxes or penalties are owed.
Agreed Case – If you agree with the ruling, the audit is considered an “agreed case” and you’ll both sign the agreement and you’ll be responsible for paying the taxes and penalties.
Unagreed Case – If you don’t agree with the agent’s conclusions the audit is called an “unagreed case” and the report will go to an IRS audit manager who will determine to approve it or not. If they do approve it, you’ll have 30 days to either pay or appeal the decision.
Tips for Surviving an IRS Audit
The most important thing to remember about IRS audits is that you always have a right to professional representation. You don’t need to face an audit on your own. Regardless of if you choose to get help or face the IRS on your own, there are some helpful tips that can help you get through an IRS audit.
Know Your Rights
Your rights include your 5th Amendment rights to due process and against self-incrimination. They also include the Taxpayer Bill of Rights.
Don’t Wait to Respond
When you receive an audit notice it’s always in your best interest to respond within the time period stated on the notice. If you ignore the notice, the IRS may issue a legally enforceable summons or just rule against you.
Be Friendly
Being rude or aggressive to the auditor or unnecessarily making their job harder will not help your case, and in fact, it could inspire them to dig deeper and go above and beyond their call of duty to make you pay. They are human, despite their reputations.
Only Provide the Information Requested
Being friendly doesn’t mean spilling your guts. If you provide extra documents the agent did not request the information on those documents can be used to investigate other aspects of your taxes and look into discrepancies that were not part of the audit’s original scope.
How We Can Help with Your Audit
If you’re facing an IRS audit the Tax Hardship Center is ready to help. We provide the advice and guidance you need to get through any type of IRS audit.
Our team of tax specialists have a proven track record of helping people with all types of simple and complex tax problems.
The Tax Hardship Center Can Help You:
- Remove tax liens
- Remove tax levies
- Prevent the seizure of assets
- Stop wage garnishments
- Set up installment plans
- Negotiate offers in compromise
- File overdue tax returns
- Defend tax audits
