Key Takeaways:
- The IRS conducts audits to verify information about a taxpayer’s tax return
- A fourth of Americans are afraid they’ll be audited
- Audit scopes vary, but the main types of audits are:
- Correspondence audit
- Office audit
- Field audit
- Ten ways to survive an audit include the following:
- Stay calm and be professional
- Gather necessary documentation before the audit
- Organize your documentation
- Don’t offer unsolicited information
- Take notes and keep records
- Be patient
- Know your rights as a taxpayer
- Understand potential consequences
- Learn from the experience
- Get professional help
An IRS audit inspires fear in many people, including business owners and individual taxpayers. The thought of going through your finances with a fine-tooth comb, answering probing questions, and potentially owing more money in taxes is enough to make anyone stressed. One study found that a fourth of Americans are afraid they’ll be audited by the IRS.
An IRS audit can be an anxiety-inducing experience, but it’s important to remember that it doesn’t mean you’re in any kind of trouble or that you’ll owe a lot of additional taxes. You can come out the other side of an audit unscathed, no matter the scope, with the right preparation, mindset, and help. This post explores some tips and strategies for surviving an IRS audit, including what an audit entails, the different scopes of audits, ways to get through it, and how to avoid common mistakes.
What Is an IRS Audit?
An IRS audit is an examination of your tax return to verify that your income and deductions are reported accurately. The IRS may suspect there are errors or discrepancies in your tax return, which triggers the audit request. The audit could be conducted in a few ways, whether through the mail or in person at your home, office, or an IRS office.
The specific items the IRS focuses on during an audit can vary, depending on the type of audit being pursued. An individual tax audit, for example, might focus on things like unreimbursed employee expenses, charitable contributions, or rental properties, whereas a business audit could focus on expenses related to inventory, depreciation, or business use of a personal vehicle. The scope of each audit will vary.
Some organizations may face something called a compliance check, which is slightly different than the scope of an audit. The IRS may want to examine whether the business is staying compliant with recordkeeping and reporting requirements. The agency may conduct a compliance check on a nonprofit to make sure their activities fall under the tax-exempt category.
It’s important to note that being selected for an audit does not necessarily mean the IRS suspects wrongdoing or fraud. Audits can occur randomly as part of the IRS’s enforcement efforts to ensure taxpayers are complying with tax laws. It’s essential to cooperate fully with the IRS and respond to requests for documentation and information in a timely and accurate manner, regardless of the reason for the audit.
The IRS auditor will have a predetermined scope in mind for the audit, including what needs to be addressed and how. They can, however, decide to examine additional information, at their discretion, if other issues come up. This is why you should never provide more information than they request.
Different Scopes of IRS Audits
The scope of an audit conducted by the IRS will depend on the situation at hand. Some can be resolved quickly, with minimal communication or extra paperwork, and some require IRS agent visits. Here are the three most common types of IRS audits you may face:
Correspondence Audit
This is the least intense type of audit. Correspondence audits usually involve mailed
communications between the taxpayer and the IRS. The agency will request additional information or documentation to support certain items on your tax return. You’ll receive a notice in the mail asking for this additional information, and the IRS will give you a deadline for responding with the requested paperwork or proof.
Office AuditÂ
Office audits are typically more thorough. An office audit is conducted at a local IRS office, and the taxpayer will be required to bring copies of their financial records to the meeting. This type of audit is usually used for more complex issues or when the IRS needs to discuss the taxpayer’s tax return in more detail. They likely cover a broader scope.
Field AuditÂ
A field audit is the most comprehensive type of audit, and may take longer than the others. Field audits are conducted at the taxpayer’s home or place of business. The IRS must notify the taxpayer ahead of time before conducting a field audit. This type of audit is reserved for more complicated or serious tax issues that require an in-person review of financial records.
The IRS contacts taxpayers about audits when it notices a discrepancy or an odd situation that the agency needs to investigate further. The best thing you can do if you’re contacted is to respond immediately, comply with the request, and be open. Make sure you prepare yourself and your documentation thoroughly to ensure the best possible outcome. Talk to a tax expert if you need assistance.
10 Ways to Survive an IRS Audit of Any Scope
An IRS audit can be an intimidating experience for any taxpayer, but it doesn’t have to be. Audits are usually pretty straightforward. Agents just want to confirm information and ensure you’re following all laws and requirements related to your taxes. Here are 10 tips for surviving an IRS audit:
1. Stay Calm and Be Professional
You may feel upset upon hearing about the audit. Never get defensive or angry in correspondence or meetings. Stay objective and answer questions truthfully. It will only be a bigger red flag to the IRS if you are overly reactive or protective.
2. Gather All Necessary Documentation Before the AuditÂ
You will need to gather information and documentation about your finances, no matter the audit scope. This may include receipts, bank statements, investment records, and other financial documentation related to the tax year being audited. Be prepared and have everything ready in advance.
3. Organize Your DocumentationÂ
You never want to make the process harder for the IRS agent. Organize everything in a way that presents your information clearly. Make it easy for the auditor to understand your financial situation and every aspect of your income and expenses.
4. Don’t Offer Any Unsolicited Information
Pay close attention to what the IRS is asking of you. There is no need to say too much and give them information about you or your business they’re not asking for. It is common for taxpayers to try to over-explain in these situations. Answer the auditor’s questions specifically and directly, without elaborating unnecessarily. You don’t want the agent to expand the existing scope of the audit.
5. Take Notes and Keep Records
Be diligent throughout the audit process about maintaining records and keeping track of what’s going on. Keep copies of all documents provided to the IRS, and make notes of any conversations with the auditor.
6. Be Patient
It’s normal to want the audit to end quickly. It can be stressful, and you want everything to go smoothly and quickly. Audits can be time-consuming, unfortunately—especially if you are dealing with a complex tax situation. It’s important not to rush the process, however. Provide what you’re asked for and be communicative, and the audit will be less painful.
7. Know Your Rights as a Taxpayer
Sometimes you may not like the end result of an audit after everything is said and done. You may believe the decision was made in error, or information may be factually incorrect. Remember that you have the right to appeal the results of an audit and to request an extension if needed.
8. Understand the Potential Consequences of the Audit
The IRS representative you work with may tell you everything you need to know about the problem and what could happen at the end of the audit. You should inquire what the process will look like if you owe additional taxes, penalties, or interest. Be prepared beforehand to deal with those issues. You should also know if the audit could result in any criminal charges, which is rare.
9. Learn From the Experience
There may be many different reasons why you’re being audited. Find out if there is something you should change in your tax preparation process or financial habits. How could the issue have been prevented? What can you do next year to avoid this process? Identify areas where you can improve going forward so you don’t have to deal with an audit again.
10. Get Professional HelpÂ
A great thing about IRS audits is that you don’t have to deal with them on your own. You may not understand what you did wrong or the potential consequences of the audit. Consider hiring a tax attorney or accountant who is experienced in dealing with IRS audits to represent you. They can explain all the steps you need to take and what’s at stake with your particular situation. They can even help with audit defense if needed.
These expert tips will help you ensure a successful outcome during an IRS audit. Remember that an audit doesn’t have to be a nightmare if you’re prepared and informed. Depend on the expertise of a tax attorney who can help guide you through the process.
Common Pitfalls of IRS AuditsÂ
IRS audits may look different depending on the scope and issue. Taxpayers make common mistakes when dealing with the IRS, however. Avoid these typical pitfalls during an IRS audit:
- Being unprepared: Not having all the necessary documentation organized and readily available can lead to additional stress and confusion during the audit. Take time to get your head on straight and gather the applicable information.
- Being dishonest: Lying or withholding information from the auditor can result in serious consequences, including penalties and even criminal charges. Never lie or exaggerate your situation, as the outcome will be much worse than if you were open and honest.
- Arguing with the auditor: It’s important to advocate for yourself, but getting into arguments or being uncooperative with the auditor can also result in a negative outcome. Many taxpayers may think they have to overly defend themselves.
- Providing too much information: Offering unsolicited or irrelevant information can confuse the auditor and potentially raise additional questions. You want to avoid that wherever possible.
- Missing deadlines: Failing to respond to the IRS in a timely manner can lead to additional penalties and legal consequences. Take the next steps right away when you get an audit notice.
- Trying to handle it yourself: Most people don’t fully understand the tax system. It is essential to seek professional guidance from a tax attorney or accountant if you’re unsure about how to handle the audit or have complex tax issues.
Ensure a smoother and more successful outcome during an IRS audit by avoiding these mistakes. Remember there are tax experts who are ready to help you during an audit so you don’t do anything that will get you into more trouble with the IRS.
Contact an Expert at Silver Tax Group for Audit Assistance
Tax audits are never something taxpayers look forward to. They can create lots of stress and uncertainty. There are steps you can take, however, to ensure the process goes smoothly and that you are prepared for the outcome after it’s over.
The tax attorneys at Silver Tax Group understand the intricacies and complexities of tax audits, and we are here to help you navigate the process. Our team of experienced tax professionals is equipped with the knowledge and expertise required to ensure your audit is resolved quickly and efficiently, giving you peace of mind. Don’t let a tax audit overwhelm you. Reach out to Silver Tax Group to speak to a tax expert about IRS audits.
