Receiving notice that the IRS will be auditing your taxes is a nightmare scenario for almost any adult, but it doesn’t need to be. Getting audited doesn’t necessarily mean the IRS thinks you’ve done something wrong. Tax returns are selected for audit by several methods, including random statistics, document matching or having business ties with someone else who’s being audited. No matter the reason for the audit the process will be easier, and less frightening, if you know what to expect.
What is a Tax Audit?
If you’ve never undergone one, you may not even know exactly what an audit is. An audit is nothing more than a review of your financial records, such as income statements, monthly expenses and bank accounts. When the IRS chooses a return for audit their goal is to examine the account, make sure all information has been reported correctly, that all tax laws have been obeyed and that accurate tax amounts have been reported. Once the audit it complete the IRS will notify you of their findings. At that time you can either agree with the audit results and accept any adjustments, fines or punishments the IRS feels are necessary or you can disagree with the results and file an appeal. A third possible outcome is that the audit will result in no changes.
The Types of Audit
We’ve all heard about some high profile case or our neighbor’s friend’s cousin whose audit resulted in a prison term. But it’s not likely your audit will have the same result. There are three different types of IRS audits and each requires a different response.
- A correspondence or office audit is the simplest type of audit. It may require nothing more than sending some photocopies to your auditor through the mail or delivering them to a local IRS office in person. In many cases the audit can be completed with a few minor corrections and meeting with an auditor is unnecessary.
- A field audit requires a face-to-face meeting with an IRS agent. If the agent finds any discrepancies after a thorough review you may face financial penalties.
- A criminal investigation audit will be requested if you’re suspected of tax evasion. Criminal investigation audits can result in large fines or imprisonment.
What Should You Do?
If your return has been selected for audit you’ll receive a notice either by mail or telephone.* Don’t panic! And don’t start searching for every receipt, payment ledger or income form you can lay your hands on. The IRS will send a written request of all the documents they want to see. If you have questions about what types of records are needed or acceptable you can contact your auditor directly.
Contact your accountant or tax preparer. In many cases the person or company who prepared the taxes also provides assistance and representation in case of an audit. Unless you’re undergoing a criminal investigation audit there’s no need to seek legal representation.
*Note: The IRS does not use email to contact people about an impending audit. If you receive audit notification through email report it as fraud and don’t respond or open any files included with the message.
If you’ve filled out your tax forms correctly and honestly your chances of being audited are very slim, almost zero. Make certain you follow all current tax codes and save important documents for three years just in case they’re needed. For more information about required tax documentation in your state, consult a tax professional.
Sources: http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/IRS-Audits, https://www.hrblock.com/online-tax-filing/guarantees/worry-free-audit-support.html, http://www.hg.org/article.asp?id=20891
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