Receiving an audit notification is a stressful experience. So many unanswered questions, so many doubts, so much dread and uncertainty… Research is the first step: the more you know about the IRS audit process, the greater your advantage and the better your chances of getting the situation under control. This quick guide will help you understand the tax auditing process from start to finish.
The IRS Audit Process
The basics of the audit process are relatively simple. The IRS will conduct a review of the schedules and documents that support the return. The auditor is looking to verify that the information is correct and accurate. They are looking for exaggerated expenses, understated income, simple miscalculations, and general clarification.
The proof part is a little more complicated. You might have to explain how you get your income, and you may have to provide documents that prove you are reporting all of your income and in the appropriate amounts. It helps to meet with an attorney to go over your figures before the audit to ensure that everything looks correct. Prepare to prove that all of your expenses and deductions were legitimate.
If you fail to prove any deductions or expenses, the IRS might disqualify those parts. This might lead to a higher amount owed. If the IRS thinks that you purposefully hid or attempted to hide income, you might face extra interest or perhaps even some harsh penalties.
Three Different Types of Audits
There are three types of audits. A correspondence audit that takes place through the mail, a desk audit at the local IRS office, and field audits at the home or business of the taxpayer (or the office of his/her attorney or accountant). Correspondence audits are understandably the least stressful of all, but if you are expecting a field audit, you need to enter the proceedings prepared.
Having your attorney ask the IRS to conduct the audit in his or her own law office will give you the advantage of professional advocacy and guidance. If an IRS visit to your home or office would make you uncomfortable, holding the audit at your lawyer’s office would be a much less stressful experience. You can even choose to phone into the audit instead of showing up in person. Take some time to click here for lawyers that can advise you about your potential or upcoming field audit.
Avoiding Future Audits
First, you might want to know why your tax return ended up in the audit pool in the first place. The IRS gets so many returns each year that it would be impossible to sort through each one by hand. Instead, their reviewers use a specialized process to determine which will undergo closer inspection. The IRS runs each return through a computer program that can identify inconsistencies and red flags related to risk. A small percentage of the audit choices are completely random.
The IRS sometimes considers previous audits to be a risk factor that influences whether they choose that taxpayer for an audit in the future but tax history is just one of many “red flags” the IRS looks for.
To reduce your chances of ending up in the audit pool again, take some time to become familiar with the risk factors that determine who gets audited: this may include owning your own business, working in a mostly-cash industry, large fluctuations in yearly income, charitable deductions that seem large when compared with your income, etc.
Make sure to have your tax returns reviewed by a competent, experienced tax professional before you submit them. Enlisting the help of an IRS-enrolled preparer, CPA, or tax lawyer can save you a lot of stress and trouble – not just by helping you to avoid audits, but also by possibly uncovering deductions and advantages you may have overlooked the first time. Make sure that your preparer signs the tax return where appropriate. Submit your return on time for best results.
Are you facing an upcoming audit? Don’t wait! Start gathering those important documents and consider investing in the confidential counsel of a qualified tax attorney. Whether you are facing a correspondence audit, desk audit, or field audit, it is understandable to feel anxious but it is imperative to take action.