Dealing with an Internal Revenue Service (IRS) audit letter is stressful, and dealing with tax audit timeframes can be overwhelming. You have no idea how long your time and energy — and possibly finances — will be tied up in addressing any issues, or what the outcome might be.
Everyone seems to agree that an IRS audit is a daunting experience, but few have an idea of what needs to be done — and you unfortunately do not have much time to prepare. You need to be able to handle that audit process as soon as you get a notice in the mail, and this quick guide will make sure you’re ready to hit the ground running.
Why a Company Gets Audited
If you are selected for an audit, it does not always signify something is wrong. In some instances, the type of audit may be entirely random, while other times it is due to a related examination. The point of a tax audit is to minimize the “tax gap,” or the difference between what the IRS office receives and what the IRS is owed.
Some of the more common reasons a company gets audited include:
- Excessive expenses and disproportionate deductions
It is fine to claim deductions. However, if these deductions are disproportionate to your business income, it is a major tax audit trigger for IRS agents.
- A significant number of independent contractors versus employees
Businesses do not have to pay state payroll taxes for independent contractors. As a result, if the state figures out that a business misclassified its workers, it will notify the IRS triggering a federal tax audit.
Unfortunately, the IRS office checks the math. Incorrect income tax numbers, missing 1099s, and even transposed numbers can mean big trouble — mainly because the IRS office tends to believe if you make a mistake on your taxes, you may be careless in your business financial dealings.
What Goes into the Audit Process
Once the IRS decides that it wants more information regarding your tax return, it will notify you by mailing you a letter. There are three different examination methods that the IRS will use to investigate.
- Correspondence Audit
Regarded as the most common type of audit, a correspondence audit is done by mail. The IRS office requests particular documents to support a specific item on the tax return, and you mail them in to comply with the requests.
- Office Audit
This audit requires you to head to an IRS office and meet with an IRS auditor. The IRS will let you know which additional tax documents are needed from you.
- Field Audit
In this audit, the IRS will come to your place of business, your residence, or your tax professionals’ office to perform the audit in person. This audit is often used if the company or individual who is being audited earned over $100,000.
After the audit, you will be mailed or handed an IRS Form 4549, or an IRS examination report. This report will indicate the proposed changes to tax liability. It will also provide you with a clear explanation of any adjustments made, and either state no changes are needed or indicate that you owe taxes plus penalties and interest.
You can either agree or disagree with these findings. If you do not approve the results, the due date for providing further information is 30 days, and you can take the following actions:
- Send in additional documents that you want to be considered.
- Request further discussion with the examiner on the findings.
- Talk to a senior manager or a group manager about the decision.
- Ask for an IRS appeal.
How Long Do Audits Take
Depending on your tax audit, the process can take anywhere from months to years.
- Mail Audits
The IRS office often notifies the individual within seven months of them filing their tax return that they are getting audited. In truth, based on tax law, the IRS has a three-year timeframe (called the assessment statute of limitations) to charge you additional taxes. Many exceptions can increase this timeframe, however, but these mail audits will usually resolve within three to six months — depending on the specific issues and how fast an individual responds to the audit letter.
- Office Audits
Generally speaking, these audits are started within a year after filing your tax return. Either you or your tax professional will meet with the IRS agent at the IRS office, and these audits can be wrapped up in three to six months depending on the facts. You can expect delays if the IRS auditor needs more documentation, though.
- Field Audits
This field audit often starts within a year after a tax return is filed. They often involve complex situations, meaning these field audits take the longest because the IRS office requires an extensive review, but many can resolve within a year.
How to Avoid Being Audited
The odds of getting audited are relatively low. However, you can reduce your chances even further by avoiding these mistakes:
Mistake 1: Not Filing a Return
You still need to file a tax return, even if you had no income or do not owe any taxes. If you do not, the IRS office may question you. Avoid this issue by filing a tax return and demonstrating you owe no taxes.
Mistake 2: Providing the Wrong Information
Yes, errors happen, but they can mean big trouble for you when they occur on your tax return. That is why you need to triple-check the numbers you are putting down and that your math is accurate before you submit your taxes. Also, make sure you remember to sign the tax return, as unsigned ones are sent back and also draw attention.
Mistake 3: Not Working With a Trusted Advisor
When you work with a trusted tax advisor, those experts can prevent costly mistakes. They can also help you discover efficient resolutions to your tax issues while providing you the support you need if you are audited. They have experience dealing with the IRS and know what information it requires, after all.
Avoid IRS Audit Timeframe Issues Altogether
IRS audits can leave anyone feeling stressed. Add in that there are time limits involved as well as a feeling of the IRS breathing down your nec, and it’s easy to see why that would be an unpleasant experience for anyone. You do not have to go through this process alone, however. Contact Silver Tax Group today to discuss your IRS audit timeframe questions, or to speak with an expert about other tax-related questions you might have.