The word "audit" tends to strike fear in the hearts of American taxpayers, but the truth is that not every audit is a result of a problem or that the Internal Revenue Service suspects you of wrongdoing. There are several reasons why the IRS might want to audit your taxes and financial information, and there are several steps you can take to make the process as painless as possible.
In light of an uptick in identity theft scams involving tax audits and returns, we want to take a moment before delving into this topic to stress that the IRS will never institute an audit process via telephone or email. Taxpayers are always alerted of an upcoming audit by U.S. mail.
Reasons for IRS Audits
Though it is undoubtedly true that irregularities generate some audits, the IRS can also request an audit to verify the information contained within your tax papers. Such as correcting a simple mistake like failing to attach a Schedule or because the individual taxpayer has some type of involvement with other taxpayers — such as business partners or investors — whose paperwork raised questions. You can even be selected for audit as a result of a random selection process designed to gauge taxpayer returns to see how they compare to national norms.
Different Types of Audits
There are three types of audits conducted by the IRS. In all cases, the taxpayer will be notified of the review by mail.
Correspondence audit – Generally a result of a low-level error or omission, the agency sends out information to the taxpayer referencing the mistake and requesting that revised information be submitted via mail.
Office audit – This type of audit is more intimidating, as it requires the taxpayer to appear at an IRS office, bringing their documentation along with them. These audits are often the result of deductions or credits that are out of the norm, such as a substantial medical expense deduction for which the agency requires documentation in the form of invoices and payment receipts.
Field audit – The most intrusive of all audits, a field audit involves IRS agents coming to the taxpayer, usually visiting either their place of business or their home to review the tax return in detail.
How to Prepare for an Audit
Receiving notice of a tax audit will put a stutter in the step of even the most meticulous and upstanding taxpayer. Still, the nerves set off by the notice can easily be offset with the knowledge that you've kept good records and maintained copies of all pertinent documents. If you haven't been keeping careful records, understand that in the face of an audit, it will be up to you to prove that you deserve whatever deduction you've taken. So, amend your ways and keep well-organized files of all financial statements, invoices, and receipts. Doing so will not only be a substantial help in case of an audit, but it will also be beneficial should you need to assess your business' health or put together a financial statement for potential investors or when applying for a loan.
If you are uncomfortable with addressing the IRS questions on your own, you have the right to be represented by a professional of your choice. That might be a CPA, an attorney, or an enrolled agent. This person or persons can go with you or for you to any face-to-face meetings. There is no requirement that you attend an audit session unless the IRS explicitly requests your presence.
After the audit is over, you will be provided with a report. If you agree with the report's contents, you can sign it or whatever assenting form the auditor provides to you.
The Taxpayer Bill of Rights
You may think yourself at the mercy of the IRS. Still, Congress enacted a taxpayer bill of rights that explicitly outlines the IRS' tax collecting abilities and the protections offered to taxpayers in the face of IRS collections. The taxpayer bill of rights includes:
Right to Be Informed
Right to Quality Service
Right to Pay No More than the Correct Amount of Tax
Right to Challenge the IRS's Position and Be Heard
Right to Appeal an IRS's Decision in an Independent Forum
Right to Finality
Right to Privacy
Right to Confidentiality
Right to Retain Representation
Right to a Fair and Just System
What if you Disagree with the Audit Decision?
Knowing that you have rights is nice, but pushing back against the decision of an IRS examiner can feel challenging. If you've complied with all of the examiner's requests and now find yourself with a Revenue Agent Report that you disagree with, there are specific steps you can take.
Ask for an informal conference with the examiner's manager before the deadline provided within the report.
Ask for an Appeals conference to occur before the deadline provided within the report.
If you have received a Statutory Notice of Deficiency, you can also file a petition with the tax court.
How to Get Through an Audit
There is no shame in being unnerved by an IRS audit, but there are several ways to minimize the stress you feel.
Don't hesitate to request a postponement if you need time to get your documents together.
Familiarize yourself with your rights.
Discuss your audit strategies with your Authorized Representative, whether that is your CPA, attorney, or another person. That person will respond directly to the assigned IRS agent.
Don't try to fake your way through an audit. Have the requested information so you can get through it more quickly.
Don't hesitate to reach out to the auditor if you disagree with the examination report they have produced.
Remember that negotiation is possible if you cannot pay a tax liability or disagree with the auditor's assessment.
One of the most important decisions you can make in the face of an audit letter is to work with an experienced tax representative who can help you with your preparations and your response. Contact our office today for information on the assistance we can provide.