IRS tax audits aren’t common, but that’s no comfort if you find yourself the subject of one. If you receive a frightening tax audit notice, remain calm and realize that the investigation is a professional practice that may be handled by simply delivering the proper papers.
Knowing what to expect will help you fix issues quickly. You will handle discrepancies, communicate with IRS agents appropriately, and complete the process with only a bit of stress. Here’s what you need to do if you receive a letter from the Internal Revenue Service informing you of a tax audit.
What Is a Tax Audit?
An IRS audit occurs when the IRS examines your financial records to confirm that all of the information on your tax return is accurate. An audit’s purpose is to make sure you’ve reported everything correctly and paid the right amount of tax.
The IRS will always send you a physical letter informing you of an audit via the US Postal Service (USPS). The letter will provide instructions, and in most circumstances, all you have to do is send the IRS the information it requests. IRS audits typically last a few years, but if the IRS discovers severe problems on your tax return, it could go back six years or longer.
How Far Back Can the IRS Audit You?
The IRS typically conducts audits within two years after filing your return. However, it has the right to go back three years depending on the due date or date you filed your return.
The IRS may review returns for up to six years if there are significant problems with your return. An example of this is willful tax fraud.
What Happens When You Get Audited?
The IRS will send you a letter through the USPS. In most circumstances, all you have to do is reply to the audit notice within 90 days by mailing additional tax documents or information.
The IRS may require you to verify your income or expenses to ensure that you are eligible for one of the write-offs claimed on your return. The majority of audits are conducted entirely by mail. If you need additional time, you can usually obtain a 30-day extension.
You May Need to Meet With an IRS Representative
There are occasions when you may need to consult with an IRS representative to review your finances. An audit’s interview phase happens in person, either in an IRS office or at your place of business.
Individuals with difficult tax returns may have to have in-person interviews, which are more usual for businesses and organizations. IRS agents will not show up at your door unannounced to conduct an audit.
The IRS will always send you a letter first. An IRS agent will not show up without first arranging a scheduled meeting with you. If someone claims to be an IRS agent and shows up at your door, make sure it’s not a scam.
You May Need to Complete a Questionnaire
If your tax return involves Form 1040 Schedule C, required for running a business or paying self-employment taxes, you may also need to fill out a questionnaire. There are several different types of surveys, but the most typical ones ask about travel costs and miles for work.
What Causes an Audit
Each year, the IRS analyzes all tax returns using a computer algorithm. The algorithm may flag your return if it includes information different from the previous year. For example, if your wages rose by $100,000 without anything else on your tax return changing, or if it contains items that aren’t usual for taxpayers in similar financial circumstances, you could be flagged.
Getting Help for an Audit
If you have to have a face-to-face meeting with an IRS agent or must appear in front of a tax court, you should seek advice from a tax specialist. Your usual tax preparer may be able to assist you with the process. But, only an enrolled agent, certified public accountant (CPA), or tax attorney can officially represent you during an audit.
If you e-filed your taxes using an online provider, you might be eligible for audit assistance. Audit support is usually an added charge, but certain services or packages include it for free. Read the terms because some products only provide general information on how audits function, while others give you everything from general advice to trial representation.
The IRS may audit you or your firm if you have conducted business with somebody who has been audited. This person could be a business associate or someone who has invested in your company.
Each year, the IRS conducts a random audit of select taxpayers to verify that its mechanisms for examining returns are functioning. Random audits are typically correspondence audits, and they may be simple if nothing suspicious appears on your return.
Documents You May Need for an Audit
The documents you’ll need to provide while in an IRS tax audit can vary depending on your circumstances, but there are certain common records that the IRS may ask from you. Always send copies of documents and maintain the originals for your records. It’s also a good idea to add a written summary explaining what’s on each document and how it pertains to your audit.
Even if you have electronic copies, the IRS may accept them. To find out which digital documents the IRS will accept, call the phone number indicated on your letter.
How to Handle an Audit
After receiving an IRS audit letter, it’s best to reply as soon as possible. Always follow the letter’s directions. It will make the audit process go more smoothly and possibly faster.
If you need to send something to the IRS, make copies of the papers and mail them to the address on the letter. If you don’t have a particular document and need a copy from someone, contact the document’s original sender as quickly as possible.
If needed, you can usually get a 30-day extension by phoning the IRS at the number on the letter. If you receive a “Notice of Deficiency” by certified mail, the IRS will not offer you an extension.
IRS Audits Are Not Fun
A tax audit is stressful. So, how horrible is it if you’re being audited? With the assistance of a tax professional, timely responses, and thorough documentation, you may get through auditing with flying colors.
We can help you navigate the trials of an IRS audit. Contact us for assistance, or check out our Resources section for more helpful information.