More than one million taxpayers faced an Internal Revenue Service (IRS) audit of their individual tax return in 2019, but that accounted for less than 1% of all returns.
If you received a dreaded audit letter from the IRS, do not panic. You must understand that the analysis is a professional procedure that may be resolved by simply presenting the appropriate paperwork.
Having an idea of what to expect can help you in addressing errors on time, handling numerical discrepancies, communicating politely with IRS agents and completing the procedure with only a moderate level of stress.
Why the IRS May Contact You
Taxpayers should know that an audit in no way means you are being accused of criminal activity. Tax returns are complex documents carrying financial data that must be assessed to confirm precision.
The audit process is known as an examination and does not mean that you have purposefully made a mistake. In fact, the IRS contacts individuals for several reasons.
Taxpayers are selected through a “random selection and computer screening” process, according to the IRS, that is dependent on a statistical formula. The IRS compares tax returns against “norms” for similar returns. If your return doesn’t follow the “norms” you may be selected for an audit.
If your tax filing includes transactions with other taxpayers, like business partners or investors, and they were audited, you also may be audited.
Some returns are selected dependent on other factors like income reported or unfamiliar deductions.
Other reasons you may be audited include:
✔ Conflicting third-party reports regarding income on 1099s or W-2s
✔ Home office deductions
✔ Rental losses
✔ Business use of a vehicle
✔ Hobby-related deductions (also known as hobby losses)
✔ Foreign currency transactions or bank accounts
Types of Audits
Based on level of severity, there are three types of audits. Most audits are not really serious, and more than three-quarters of audits are completed through the mail, according to news reports.
1. Correspondence (Mail) Audit – Routine errors from inaccurate math or missing paperwork are often handled through correspondence.
2. Office Examination Audit – An office examination is planned at a local IRS branch where they will generally try to check if you reported all of your income and that your deductions are legitimate.
3. Field Audit – A field audit is the most extensive of the three types of audit. An IRS agent will visit to your home, business or accountant’s office to assess records and files in order to verify that your tax return information is correct.
Preparing for an Audit
If you are being audited, the IRS will contact you by mail or telephone. They will never contact you through your email. Included in the notice will be the precise information that is to be evaluated and what supplementary documents you may need to present.
You have a period of 30 days to respond to an audit notice. Do not put off your response, as the time you spend ignoring a letter can be time that interest builds on the amount you owe the IRS.
Before an audit, you need to get your paperwork ready, have an understanding of what the problem is and determine if you want to be represented.
Put all the forms the IRS has requested together. You will want to make sure you have copies, not originals. Put your paperwork in order, and ensure the documents you have correspond with the year that is under audit. If you discover you have misplaced certain records, call and request that duplicates be sent to you immediately.
Documents you may be asked to bring along can include:
✔ Home mortgage statements
✔ Previous tax returns
✔ Receipts
✔ Brokerage statements
✔ Retirement account records
✔ Pay stubs
You may want to seek the assistance of a tax professional to assess your documents and make sure you understand what the difference might be. If you completed your taxes at home using an online filing service or through a tax compilation company, the company may offer an audit defense service for a fee.
Know Your Rights during the Appointment
For the main appointment, you can attend by yourself or decide that a tax representative attends in your place or alongside you. It may be expensive, but a certified public accountant (CPA), attorney or IRS Enrolled Agent or paid preparer of your return can stand in for you.
The audit will take place at an IRS office or at your house; you should be polite and compliant. Only show the IRS agent documents that are particularly requested.
At the same time, you have rights and deserve just treatment. Here are your taxpayer rights during the audit process, according to the IRS:
✔ A right to professional and courteous treatment by IRS employees
✔ A right to privacy and confidentiality about tax matters.
✔ A right to know why the IRS is asking for information, how the IRS will use it and what will happen if the requested information is not provided.
✔ A right to representation, by oneself or an authorized representative
✔ A right to appeal disagreements, both within the IRS and before the courts
After the Audit
An IRS audit may come to an end with no changes, an agreed-upon change or changes that the taxpayer disagrees with and appeals.
After the interview process, the examiner will present a computer-generated audit report to you, which will include the amount of additional tax that is assessed, an explanation of how your return will be changed, options for how you can appeal the report and a space that indicates whether you consent or disagree. Signing the report implies you are giving up your right to go to Tax Court.
If you are not certain whether you agree with the report, you do not have to sign it. You can request to speak with the agent’s supervisor to evaluate the documents further. You can appeal the decision after this, request assistance from your tax specialist and go to court if necessary.
Any tax deficiency will accumulate interest at a rate of 5% per year from the date of the initial return until you pay the bill. The interest is compounded daily. The IRS examiner will often have this information prepared, showing the total you owe.
Based on the type of mistakes discovered during the audit, you could also face a penalty of up to 25% of the deficiency, and, for more serious cases, possible incarceration. More than one million taxpayers faced an Internal Revenue Service (IRS) audit of their individual tax return in 2019, but that accounted for less than 1% of all returns.
If you received a dreaded audit letter from the IRS, do not panic. You must understand that the analysis is a professional procedure that may be resolved by simply presenting the appropriate paperwork.
Having an idea of what to expect can help you in addressing errors on time, handling numerical discrepancies, communicating politely with IRS agents and completing the procedure with only a moderate level of stress.
Why the IRS May Contact You
Taxpayers should know that an audit in no way means you are being accused of criminal activity. Tax returns are complex documents carrying financial data that must be assessed to confirm precision.
The audit process is known as an examination and does not mean that you have purposefully made a mistake. In fact, the IRS contacts individuals for several reasons.
Taxpayers are selected through a “random selection and computer screening” process, according to the IRS, that is dependent on a statistical formula. The IRS compares tax returns against “norms” for similar returns. If your return doesn’t follow the “norms” you may be selected for an audit.
If your tax filing includes transactions with other taxpayers, like business partners or investors, and they were audited, you also may be audited.
Some returns are selected dependent on other factors like income reported or unfamiliar deductions.
Other reasons you may be audited include:
✔ Conflicting third-party reports regarding income on 1099s or W-2s
✔ Home office deductions
✔ Rental losses
✔ Business use of a vehicle
✔ Hobby-related deductions (also known as hobby losses)
✔ Foreign currency transactions or bank accounts
Types of Audits
Based on level of severity, there are three types of audits. Most audits are not really serious, and more than three-quarters of audits are completed through the mail, according to news reports.
1. Correspondence (Mail) Audit – Routine errors from inaccurate math or missing paperwork are often handled through correspondence.
2. Office Examination Audit – An office examination is planned at a local IRS branch where they will generally try to check if you reported all of your income and that your deductions are legitimate.
3. Field Audit – A field audit is the most extensive of the three types of audit. An IRS agent will visit to your home, business or accountant’s office to assess records and files in order to verify that your tax return information is correct.
Preparing for an Audit
If you are being audited, the IRS will contact you by mail or telephone. They will never contact you through your email. Included in the notice will be the precise information that is to be evaluated and what supplementary documents you may need to present.
You have a period of 30 days to respond to an audit notice. Do not put off your response, as the time you spend ignoring a letter can be time that interest builds on the amount you owe the IRS.
Before an audit, you need to get your paperwork ready, have an understanding of what the problem is and determine if you want to be represented.
Put all the forms the IRS has requested together. You will want to make sure you have copies, not originals. Put your paperwork in order, and ensure the documents you have correspond with the year that is under audit. If you discover you have misplaced certain records, call and request that duplicates be sent to you immediately.
Documents you may be asked to bring along can include:
✔ Home mortgage statements
✔ Previous tax returns
✔ Receipts
✔ Brokerage statements
✔ Retirement account records
✔ Pay stubs
You may want to seek the assistance of a tax professional to assess your documents and make sure you understand what the difference might be. If you completed your taxes at home using an online filing service or through a tax compilation company, the company may offer an audit defense service for a fee.
Know Your Rights during the Appointment
For the main appointment, you can attend by yourself or decide that a tax representative attends in your place or alongside you. It may be expensive, but a certified public accountant (CPA), attorney or IRS Enrolled Agent or paid preparer of your return can stand in for you.
The audit will take place at an IRS office or at your house; you should be polite and compliant. Only show the IRS agent documents that are particularly requested.
At the same time, you have rights and deserve just treatment. Here are your taxpayer rights during the audit process, according to the IRS:
✔ A right to professional and courteous treatment by IRS employees
✔ A right to privacy and confidentiality about tax matters.
✔ A right to know why the IRS is asking for information, how the IRS will use it and what will happen if the requested information is not provided.
✔ A right to representation, by oneself or an authorized representative
✔ A right to appeal disagreements, both within the IRS and before the courts
After the Audit
An IRS audit may come to an end with no changes, an agreed-upon change or changes that the taxpayer disagrees with and appeals.
After the interview process, the examiner will present a computer-generated audit report to you, which will include the amount of additional tax that is assessed, an explanation of how your return will be changed, options for how you can appeal the report and a space that indicates whether you consent or disagree. Signing the report implies you are giving up your right to go to Tax Court.
If you are not certain whether you agree with the report, you do not have to sign it. You can request to speak with the agent’s supervisor to evaluate the documents further. You can appeal the decision after this, request assistance from your tax specialist and go to court if necessary.
Any tax deficiency will accumulate interest at a rate of 5% per year from the date of the initial return until you pay the bill. The interest is compounded daily. The IRS examiner will often have this information prepared, showing the total you owe.
Based on the type of mistakes discovered during the audit, you could also face a penalty of up to 25% of the deficiency, and, for more serious cases, possible incarceration.