What does it mean to be audited, and what are common IRS audit triggers?
Most people think of the word “audit” as one of the worst five-letter words in the English language. But in many cases, the fear of an audit from tax administration is actually worse than the audit itself. Plus, the average person stands a small chance of being audited. Chances increase when tax fraud and tax evasion come into the picture. When the IRS audits your return, they look to see if you correctly reported tax information and paid the right amount of tax. If you view it another way, it’s just a review to keep the whole tax system fair. You have nothing to worry about if you reported your information correctly and kept good tax records. But if you find yourself in the position of being audited, there are a few things you can do to course-correct your trajectory back on track.
The IRS audit process;
So, what happens if you get audited by the IRS? Essentially, there are two ways you could be audited: by mail or in person. We’ll walk through each case below so you can easily follow along.
The IRS audit letter: The mail audit process
The most common type of individual tax return audit is a mail audit, also called a correspondence audit. The IRS will mail an official notice requesting specific answers and documents to support a triggering detail within your filed return. Examples include income, deductions, or a tax credit.
When your response is requested, the most important things to do are:
● Respond to the IRS with all evidence by the specified deadline.
● Remain actively involved with the process, including any filed appeals or disputes.
When exchanging documents with the IRS, be sure to include an explanation of how each item supports your filed return. When information can’t be located, providing a thorough explanation via “oral testimony” could be the next step.
Suppose you disagree with the IRS decision on your return, including any proposed penalties. In that case, you may be able to file an appeal with the IRS.
The face-to-face audit process
Audits within an IRS office are called the office audit or desk audit. Office auditors, called tax examiners, focus on specific items on the questionable tax return. When the IRS conducts an audit at your home or business location, it’s called a field audit.
Revenue agents review all types of returns, especially taxpayers with a high net worth or complicated returns with potential mistakes.
You can expect four phases during an office or field audit.
1. Audit notification and preparation: The IRS notifies you (or both you and your authorized tax preparer) about the audit, almost always by mail. Usually, the audit will be for a return you filed within the past two to three years. The IRS will send a request for information (IRS Form 4564, called an Information Document Request, or IDR). The IDR will show you what the IRS is interested in auditing. But don’t assume the audit ends there; office and field audits involve more than one year and often expand to other issues.
2. Initial interview: Office audits take a few hours to complete.For field audits, this process can take up to a full day, depending on the complexity of the tax return. During this time, you will give the IRS auditor the big picture of your circumstances, your business, the tax year under examination, and the items requested by the auditor. A tax preparer can also represent you during this process.
3. Issue development: Inevitably, the IRS will focus on a few items — and might ask a lot of questions about your return, finances, and more. In this stage, you or your tax preparer must advocate for your case and provide explanations to the auditor. If the auditor proposes an adjustment to the return and/or penalties, you will need to decide to agree or start preparing your appeal.
4. Finalizing the audit and appealing the decision, if necessary: If the appeals process is your next step, an impartial person in the IRS Office of Appeals will consider your petition at an appeals hearing. This hearing is held months after the audit has ended and will likely take place by phone. You can request a face-to-face meeting with the appeals officer if you prefer. If you disagree with the decision, you could eventually take your case to the U.S. Tax Court.
The audit process can be time-consuming, but it doesn’t last forever. Once you’ve provided the necessary documentation, cooperated with the auditor, and addressed any issues, the audit will eventually come to a resolution, and you can put it behind you. Source