Everyone dreads the inevitable time of year when you’re gathering paperwork and receipts to file your annual tax returns.
Nothing is quite as scary as an IRS audit, so how do you cope if you find out you’re on the IRS’s radar? And do you know the types of IRS audits and their differences?
This helpful guide will discuss the three types of tax audits, how you should handle them, and what you can do to stay calm and get the issue resolved. Read on to learn more!
Why Am I Being Audited?
Your first question, if you’re dealing with an IRS audit, is probably “why.” Most people assume that they’re being audited because there’s a significant issue with their tax returns that they didn’t notice before they submitted them.
The reality is that the IRS may audit you for several reasons, and it’s not always because they think you’re cheating on your taxes. The IRS uses a computer program that scores tax returns based on experience with other, similar tax returns.
Other times, you may be the unlucky one who was chosen for an audit as a random sample. The IRS may want to check the documents you received from an employer against what you reported to make sure everything is in line.
Of course, there are other things can trigger an IRS audit. If you make a lot of money, your odds of getting audited are much higher. In other words, people with an income of $1 million or more have a better chance at becoming an audit victim.
Other triggers may include an income discrepancy on your tax return that shows a mismatch between your employer’s forms and what you report. If the amount on your W2 or 1099 is different from what you claim, this could easily trigger an audit.
People who use many deductions that seem out of the ordinary are often part of an IRS audit. Don’t deduct too many line items on your tax return unless you have the paperwork to back it up. If you’re self-employed or a business owner, your odds of being audited are even higher.
Please pay close attention to the things you deduct and try not to claim excessive losses unless they’re legitimate. Anything that seems extreme or out of the ordinary may prompt the IRS to audit you. Use a tax professional to help you stave off any possibility of a glaring discrepancy when you go to file.
The Three Types of IRS Audits
There are three distinct types of tax audits, and the IRS has the final say in which one they plan to use. Each one is performed using a different method and will always require cooperation on your part.
1. Correspondence Audit
The first type of audit is called a correspondence audit, and it’s the most common method. Correspondence audits are geared toward less-complicated tax returns, and the IRS representative can usually perform the audit by mail. If you’re being audited, a corresspondence audit is the most preferred choice since you won’t need to talk to anyone in person.
2. Office Audit
An office audit is performed for some cases, and you will have to take your receipts and documentation directly to a local IRS office and speak with an IRS agent. This type of audit is common among small business owners, or where a lot of paperwork is required.
3. Field Audit
And finally, a field audit is when an actual IRS agent comes to your home or place of business. Field audits are much more complex, and they require an experienced tax professional to perform. The IRS agent will give you plenty of advance notice if they plan to conduct a field audit so you can prepare.
IRS Audit Notifications
You’ll first receive a notice via mail if the IRS chooses your tax return for an audit. Then, they may ask you to schedule an appointment for an interview either by mail, at a local IRS office, or even at your place of business.
In addition to the notification, the IRS will also tell you what records they need. A form called an Information Document Request is their formal request for backup and other documentation. It’s a good idea to hang onto all of your tax returns and backup documents for three years after you file, just in case you’re audited.
After the audit is performed, the IRS will notify you of the outcome. The result could be that there are no changes, or there could be some changes that you agree to. If you don’t agree with the changes, the auditor will still notify you, and you’ll need to either pay what you owe or try to appeal.
What to Do if You’re Being Audited by the IRS
If you end up receiving a notice of an IRS audit, there’s no need to panic. Just because you’re being audited, it does not mean that you made a mistake on purpose or that you’ve tried to commit tax fraud.
In most cases, the taxpayer gets through the audit fine and ends up having no changes in terms of their tax liability. It would be best if you found out as much as possible once you discover you’re going to be audited.
The sooner you get to work on resolving the issue, the less in fines, penalties, and interest you will have to pay. A representative from the IRS will let you know when you can schedule an appointment within two weeks of receiving the audit notification. It’s important to note that you can’t postpone the date for more than 45 days without the approval of an IRS supervisor.
Get the name, ID number, and phone contact number of the IRS contact person you’ve been assigned. It is usually indicated on the top right-hand corner of your official notice. You can also have a professional tax representative call the office on your behalf to schedule the appointment.
Helpful Tips When Dealing With The IRS
If you’re aware that there is a severe problem with your tax returns, you should seek the help of an experienced tax professional. Time is critical when you’re dealing with the IRS, so don’t delay.
For more simple audits, you’ll need to gather any documentation and receipts and have everything ready ahead of time. Read over everything carefully and be prepared to explain anything that may have caused a red flag.
When it comes to small discrepancies, you can likely deal with the IRS yourself. Just make sure you know what they want, and understand that you can interrupt your audit any time you need to and ask for a tax professional’s help if you feel overwhelmed.
You should receive an official confirmation letter in the mail once you’ve agreed to set an appointment date. This letter will include the location, date, and time that you’ve decided and agreed upon.
The IRS will also send you the document request form with details of what records they need to review. Gather these documents together ahead of time and call your tax professional if you need help or have questions.
How to Handle an IRS Field Audit
Unlike the correspondence audit, a field audit can be extremely intimidating since you have to face the IRS representative in person. This rep may look for several things when they visit, so it’s crucial that you are fully prepared.
IRS auditors are specially trained to pay close attention to the initial interview so that they can create a better picture of where you stand financially. This includes both personal and business audits.
Always be polite and remember that this is a formal interaction, so remain calm and professional. Don’t lie to the agent. If they ask a question and you don’t know the answer, be honest, and tell them so.
Dealing with IRS Auditors
Auditors usually ask questions that they already know the answer to as a “test” to determine your trustworthiness. If you don’t want to answer specific questions, it’s best to say you don’t know rather than tell them a lie.
Always keep your answers short, concise, and to the point. Yes, and no should work fine for most questions. Try not to make small talk as it could indicate to the auditor that you’re nervous or hiding something.
Many IRS agents are quiet on purpose to gauge your reactions and body language. Let the agent read over documents or go through files as you wait in silence. Never argue with an agent if they say something you disagree with.
If you find that you feel intimidated or uncomfortable, remember that the process will soon be over. Just answer everything correctly and stick to the task at hand as much as you can. If you’re still not comfortable, consider hiring a tax professional who can represent you and be your advocate.
A CPA or a tax attorney will know how to handle any of the 3 types of tax audits and can communicate on your behalf. That doesn’t mean you should give the auditor the silent treatment. Tell them you’ll need to refer to your accountant or lawyer if there are questions you aren’t sure about.
The Odds of an IRS Audit
Even though dealing with a tax audit can be scary, the odds of you getting one can vary widely. Most of the time, it depends on your income, your claimed deductions, and whether or not you’re an owner of a small business or are self-employed.
Even if you fall into a specific category, your odds of being audited are still pretty slim. Most personal tax returns are not audited, which means your chances are quite small unless you own a business.
If you do not file a Schedule C, you likely won’t have to deal with an audit from the IRS. In most cases, audits are performed for those who are self-employed to make sure they’re paying their taxes correctly based on their income. Deductions like office space, business supplies, and utilities are also scrutinized for small business owners and the self-employed.
But even if you work for yourself, there’s no need to panic. If your income looks reasonable and you’ve paid your quarterly taxes, you may never have to deal with any of the 3 types of IRS audits.
Make Your Audit Successful
The key is not to panic if you receive an official audit notice in the mail. Find out what kind of documentation the IRS will need, gather your information, and schedule your appointment.
If you have a correspondence or office audit, the odds are that everything will be resolved relatively quickly. When in doubt, don’t take the risk. Consult with a tax professional. Tax attorneys can properly walk you through the process and help you get everything you need for success.
Don’t delay if you do get an audit notice in the mail. Please stay in contact with your IRS representative and make sure you provide them with everything they need promptly.
As long as you have a tax attorney by your side and do your due diligence, your chances of coming out of an IRS audit just fine are much higher. Remember, stay calm, keep notes, and provide backup. Then hopefully (and more than likely), you may end up with results that are in your favor.
Keep Calm and File On
Getting an IRS audit notice is not the end of the world. And even if the odds of you being audited are small, it’s always good to know how to handle each type of audit just in case you have to deal with it.
Make sure you have the necessary paperwork, documentation, and all backup so you can be ready for whatever comes your way. Keep in contact with the IRS and stay open to communication to make sure the process goes smoothly.
If you need a professional tax attorney, be sure to visit our website and contact us today to schedule your free consultation. We can help with any of the three types of IRS audits and work for a successful outcome.