Contrary to popular belief, IRS audits are actually a very rare occurrence in this day and age. Statistically, the average citizen has a less-than-1% chance of being audited by the IRS. Even still, being audited is not the end of the world. It doesn’t even necessarily mean that you owe money to the IRS.
According to the Internal Revenue Service’s official description, an audit is “a review/examination of an organization’s or individual’s accounts and financial information to ensure information is reported correctly according to the tax laws and to verify the reported amount of tax is correct.”
An audit is not a bill. If the auditee can provide proper documentation about the tax return in question, everyone goes home happy. The IRS has their answers, and the auditee owes nothing. An audit will only become a bill if the discrepancies are found and agreed upon by both parties, or if the auditee either doesn’t respond to the IRS’s requests or doesn’t provide adequate records that support the original tax return.
An IRS audit doesn’t always mean there’s a problem. How the IRS conducts an audit also depends on the severity of the situation. Knowing how and why you’re being audited will help you determine your best course of action.
There are two main ways in which the IRS will conduct an audit. One is by correspondence, and the other is face-to-face. However, realistically there are four different ways in which the IRS can carry out an audit, based on the severity of the situation.
There are several reasons why you might be on the receiving end of an audit. The IRS is always updating and re-evaluating their tax check systems. Through data algorithms, the IRS develops “norms” for a given tax return. Your tax return is then compared to these “norms,” looking for inconsistencies or red flags.
However, sometimes an audit is performed as a check on the validity of their “normal” data. Other times, auditing one person or business may result in the IRS auditing other related tax returns. The following are four main reasons why the IRS may audit you.
Audit Triggers are automatic red-flag alerts for the IRS. These triggers are put in place to help streamline the processing of millions of tax returns each year. These triggers may occur for several different reasons. As long as you can provide the appropriate documentation when prompted by the IRS, then you will receive no fines. However, if the triggers result in the IRS changing your tax return, you may owe money and potentially serve jail time. Here are several common Audit Triggers.
Once the IRS initiates an audit, they may request several different types of documentation and proof to help facilitate the process. They will provide you with a written list of documents needed to prove or disprove the tax return discrepancies. Some electronic files are accepted already, with more becoming acceptable each year as the digital age advances, but many instances still require hard copies and paper documentation.
Contact your auditor to find out what form is required for each document. The IRS should provide you with a written list of all documents needed and in what form they accept them. The IRS may also require you to fill out a questionnaire for more information. Here is a list from the IRS’s website of many typical examples of what an auditor may request.
First and foremost, you should know your rights as a taxpayer. Knowing is half the battle and the more you know, the better prepared you will be for anything tax-related.
Secondly, if you didn’t file your own taxes, you should contact the tax advisor who prepared your tax return immediately upon receiving an audit letter from the IRS.
If you are still worried, confused, or intimidated by the IRS audit process, or if your audit is a face-to-face Office or Field Audit, you should consider hiring a tax lawyer to help navigate you through the process.
For any help regarding tax preparation, submitting tax returns, or IRS audits, contact Volpe Consulting & Accounting today for a free consultation!