The IRS, or Internal Revenue Service, may conduct an audit in order to review the financial accounts and financial information of a business, organization, or individual. Such reviews are done in order to determine whether the taxpayer has been properly reporting the required information correctly, as dictated under the federal tax laws. Audits are also conducted in order to verify whether the amount of money that has been reported for tax purposes is accurate.
When the IRS chooses a person or an organization to be audited, this does not necessarily mean that an error has been made or found. Audits are selected by using a variety of methods, including but not limited to:
- Random selection via computer screening, which is based on a statistical formula;
- Documents that the person has reported do not match each other;
- Submitted documents are somehow inaccurate; and
- The taxpayer’s information that has been reported involves one or more issues, and requires an examination or review in order to determine what error was found.
Income tax return audits are often randomly requested, and as such they can occur at any time. However, audits are often triggered by large discrepancies between itemized deductions and profits or losses. Additionally, the IRS also pays special attention to the following groups:
- Offshore credit card users;
- High-risk, high-income taxpayers;
- High-income non-filers; and
- Unreported income.
Additionally, there is no minimum or maximum amount of time that must elapse between audits of the same taxpayer. What this means is that an audit can happen during any year, even if the taxpayer has just recently been audited.
What Evidence Do I Need In Order to Prepare For an IRS Audit?
If you receive an audit letter from the IRS, it is important that you do not panic. An audit does not necessarily mean that you are in trouble with the government. In order to prepare for an audit, you should examine your records in order to determine whether the IRS wants to audit your entire income tax return, or simply a portion of it. Some examples of documents that you should gather include all of your:
- Bank statements;
- Canceled checks;
- Receipts; and
- Other financial records that are relevant to your tax return, for only the year that you are being audited.
You should limit the information that you provide to what the auditor is requesting. What this means is that you should not volunteer any information that is not being requested. Additionally, you should not provide information for other tax years. Doing so may result in an audit of more of your tax returns.
If the issue involves documenting a tax deduction or credit, you should provide copies of the appropriate documents to the IRS. Make sure to keep the original documents for yourself. If the IRS wants documents that you no longer possess, do your best to try to reconstruct them. You may also wish to provide worksheets to the IRS, which demonstrate how the tax figures in question were calculated.
Some other suggestions to prepare for an audit include:
- Consult with a tax attorney or other advisor if your issues are particularly difficult;
- Be organized by arranging documents in categories of the tax items in question; and
- If you are unsure of exactly what the IRS is looking for, do not be afraid to ask questions in order to clarify the audit request.
It is important to note that the IRS also accepts electronic records. If you keep your records electronically, the IRS could request that you produce those records, instead of or in addition to other kinds of records. You should contact your auditor in order to make sure that any electronic records you provide are contained in a software program that is compatible with that used by the IRS.
What If I Do Not Agree With the Result of My IRS Audit?
There are several rights that taxpayers have during the audit process. These rights include:
- A right to professional and fair treatment by the IRS;
- A right to privacy and confidentiality regarding tax matters and information;
- A right to know the reason as to why they are being audited;
- A right to know why the IRS is requesting specific information;
- A right to know how the IRS will use their tax information once it has been requested to be audited;
- A right to legal representation, such as being represented by a tax lawyer; and
- A right to appeal the decision both within the IRS, and before the courts.
If an audit error is detected, a conference will be set up and a manager will be assigned to the case. The manager is responsible for conducting further review of the issues that were discovered. If the taxpayer disagrees with the audit findings, they have the right to appeal their decision. They may take the case to an appeal mediation program, or they may file an appeal request.
You would file an appeal in the federal Tax Court. The Tax Court hears cases in which the IRS determines that you owe taxes and penalties of $50,000 or less per tax year. The Tax Court is similar to a small claims court, in that there is no jury and the judge’s decision is final. However, in opposition to small claims court, legal representation is allowed.
It is important to take into consideration that your odds of avoiding an adjustment, or an additional tax obligation, is low. This is largely due to computers and evolving technology, so that the IRS is almost assured to audit tax returns in which an adjustment will be the result. Your goal should be to minimize your adjustment amount, as opposed to attempting to entirely avoid an adjustment. The IRS could drop the tax penalty if you are able to prove that you made an honest mistake in preparing your tax return. If you have made a mistake, prepare a letter explaining the mistake.
What Else Should I Know About the Audit Process?
How long the audit lasts will depend on the following factors:
- The type of tax audit being conducted;
- The complexity of the documents being reviewed;
- The accessibility of the requested information;
- The availability of each party for the scheduling of meetings; and
- Whether you agree or disagree with the findings of the audit, and will be appealing the results of the audit.
The IRS will send you a written request, asking for the documents that are necessary to conduct an audit. You are required by law to retain the records that were used in the preparation of your return. As such, it is recommended that you retain those records for three years from the date on which your tax return was filed.
An audit can take place through the mail, or a face-to-fact interview. An in-person interview could occur at any of the following locations:
- A local IRS office;
- The taxpayer’s home;
- The taxpayer’s place of business; or
- The taxpayer’s accountant’s office.
The IRS will inform you of which records you must provide for the review. You may be required to amend your return; however, it is also possible that you do not need to make any changes to your return. If your account is chosen to be audited, the IRS will inform you by mail or telephone. The IRS does not use email notification.
Do I Need an Attorney to File an IRS Audit Appeal?
If you are being audited, or you have been audited and wish to appeal the results, you should consult with a local and experienced tax attorney. Because IRS audits can be a complex and intimidating process, an experienced tax attorney can provide you helpful information, and help guide you through the audit process.
A tax attorney can also help you gather the requested documentation and file your appeal. Finally, an experienced tax attorney can also represent you in court, as needed.