An IRS audit is a review or examination of a person or organization’s books and financial information to ensure that the right data is being reported.
The audit also confirms that the taxpayer has reported the right amount of tax and has complied with all applicable tax regulations.
How Are the Tax Returns Selected for Audit?
The IRS has a variety of methods for selecting the returns that will be audited. Random selection and computer screening, where the basis of selection is a statistical formula, is one such approach.
The IRS may also make an effort to compare records. An audit may be warranted if the payer records, such as Forms W-2 and Forms 1099, differ from the information presented.
Additionally, suppose your return involves problems or transactions with other taxpayers, such as business partners or investors, whose returns were picked for audit by the IRS. In that case, the IRS may opt to examine your return.
What Are the Odds of an Audit?
Only a small percentage of individual tax returns are audited each year. Computer programs may be used to decide which returns need to be audited, as was already mentioned. These systems decide which returns to audit by creating norms after reviewing millions of returns. A tax return is more likely to be audited if it considerably deviates from the accepted standard.
The most frequent causes for a return to be tagged for an audit or for the IRS to become interested in a personal return include, but are not limited to:
- Incomplete tax returns, such as those that have omissions of data or math errors;
- Unreported earnings
- A failure to disclose received taxable income;
- Suspiciously low income, such as when it differs significantly from that of others in the same occupation;
- Unusually high income;
- Revenue fluctuations that are significantly different from what was previously stated;
- Too many donations to charities, such as those without recorded receipts or other evidence of the donation;
- Involvement in tax fraud;
- A lot of expensive itemized deductions for which a person is not eligible; or
- Conflicts between federal and state tax returns.
It’s important to remember that an audit red flag does not always imply that the IRS will audit someone. The information and reported returns of the taxpayer must be given to a real person for inspection and evaluation when a tax return is brought to the IRS’s notice.
This would be in contrast to just accepting a computer scan’s conclusions. An audit will be planned if the person doing the examination finds evidence of suspicious behavior in the person’s tax filings.
What Locations Are Used for Audits?
An audit may be conducted by mail, in person, or by examining the taxpayer’s records and conducting an in-person interview.
The following locations are all possible for the interview:
- IRS division
- Home of the taxpayer
- Business of the taxpayer
- The accounting firm
Which records you must supply for review will be disclosed to you by the IRS. You might have to modify your return as a result of the audit. It’s also feasible that you won’t need to modify your return at all. The IRS will contact you by phone or mail if your account is selected for audit. The IRS will give you a confirmation letter regarding the audit if you are alerted by phone. The IRS does not use email alerts.
What Must I Do If the IRS Is Auditing Me?
IRS audits may be conducted in person, by mail, or both. The records of the taxpayer may also be examined.
If the IRS is auditing you, they will let you know which records you need to furnish for inspection. As a result of the audit, you might need to modify your return. Furthermore, it’s feasible that you won’t need to modify your return at all.
If the IRS decides to audit your account, they will contact you by phone or mail to let you know. In addition to calling you to inform you of the audit, the IRS will also write you a letter of confirmation. It is crucial to highlight that none of the IRS’s processes involve email notification.
As a result, if you get an email saying you’re being audited, you shouldn’t do anything or give the sender of the email any information.
What Protections Do I Have During an Audit?
You have rights as a taxpayer during an audit. These rights consist of:
- A right to receive courteous and expert treatment from IRS agents.
- A privacy and confidentiality right concerning tax matters.
- A right to be informed of the IRS’s justification for asking for information, how it plans to use it, and what will happen if it doesn’t get it.
- A right to representation, either by you or a third party with your permission.
- A right to appeal disagreements to the IRS and to the courts.
What Is the Length of the Audit Process?
The following factors determine how long the audit will last:
- The type of audit being carried out.
- The difficulty of the documents that must be read.
- The availability of the desired information.
- The readiness of each side for meetings that are planned.
- Whether you concur or disagree with the audit’s conclusions.
You will receive a written request from the IRS requesting the records needed to conduct an audit. You are obligated by law to keep the records that were utilized to prepare your return. You must maintain such records three years after your tax return filing date.
Which Records Formats Does the IRS Accept?
The IRS also accepts electronic records. The IRS may ask you to produce electronic records instead of or in addition to other types of records if you keep records electronically. You should speak with your auditor to ensure that any electronic records you send to the IRS are in a format that is compliant with the IRS’s software program.
Final Results of an Audit
There are three possible outcomes for an audit’s conclusion:
- An audit might not produce any changes. This indicates that there have been no modifications to the papers that you have independently verified.
- If you undergo an audit, you might decide to accept the IRS’s suggested modifications.
- You might disagree with the IRS’s suggested adjustments after an audit.
If you concur with the audit results, you will be asked to sign an examination report or a document of a similar nature. If you disagree with the audit findings, you can ask for a meeting with a manager to further discuss the problems. An appeal may also be made.
A conference will be planned, and a manager will be assigned to the case if an audit error has been discovered. The manager is to examine the problems in further detail. The taxpayer can appeal the judgment if they don’t agree with the audit results. They could also submit an appeal request or take the matter to an appeal mediation program.
If the taxpayer can show that an honest error was committed in the preparation of their return, the IRS may waive the tax penalty. If you think you committed a mistake, write a letter outlining it and asking for forgiveness.
Should I Seek Legal Advice?
A tax attorney should be consulted if you are going to be audited. An experienced tax attorney can represent you during the audit and assist you with preparation.