18. What Are Tax Audits?
A tax audit is an examination of your tax return by the IRS to verify that your income and deductions are accurate.
A tax audit is when the IRS decides to examine your tax return a little more closely and verify that your income and deductions are accurate. Typically, your tax return is chosen for audit when something you have entered on your return is out of the ordinary. There are three main types of IRS audits: the mail audit, the office audit and the field audit.
Mail audits
No matter what type of audit the IRS decides to conduct, you will receive notification of it by mail. A mail audit is the simplest type of IRS examination and does not require you to meet with an auditor in person.
Typically, the IRS requests additional documentation to substantiate various items you report on your tax return. For example, if you claim $10,000 in charitable deductions, the IRS may send you a letter requesting proof of your donations. Generally, submitting sufficient proof will conclude the audit in your favor if the IRS is satisfied.
Office audits
An office audit is an in-person audit conducted at a local IRS office. These audits are typically more in-depth than mail audits and usually include questioning by an audit officer about information on your return. You will be asked to bring specific information to an office audit, such as the books and records for your business or your personal bank statements and receipts. You also have the right to bring an accountant or lawyer to represent you at these meetings.
Field audits
The field audit is the broadest type of examination that the IRS conducts. In these cases, an IRS agent will conduct the audit at your home or place of business. Generally, field audits are conducted when the IRS is questioning more than just a deduction or two. A field audit is generally very thorough and will cover many, if not all, items on your return.
Possible outcomes of an audit
There are three possible outcomes of an IRS audit. If the IRS is satisfied with your explanations and the documentation you provide, then it will not change anything on your tax return. If the IRS proposes changes to your tax return, you can either agree and accept the changes or challenge the agent's assessment. If you agree, you will sign an examination report or other form provided by the IRS and establish some type of payment arrangement. If you disagree with the findings, you can set up a conference with an IRS manager to further review your case or you can request a formal appeals conference.
One day, you get a letter in the mail from the IRS, hoping to discover a tax refund in the envelope. You carefully read the letter stating that your tax return has been selected for examination. In other words, your tax return is being audited. You’re thinking the nightmare of filing taxes hasn’t ended. However, tax audits come in different types and forms. Read on to learn about IRS tax audits and discover how to handle them.
Tax Audit: The Basics
A tax audit is a formal examination conducted by the IRS to verify information or uncover fraud and inaccurate tax returns. The IRS selects tax returns to examine both randomly and intentionally. If the audit is selected randomly, the IRS will simply take a closer look to make sure all information are accurate. The IRS will intentionally audit certain tax returns if there are issues, errors, or possible frauds in reporting the tax return.
The IRS sends out audit notification letters by mail for the following several reasons:
(1) you have a balance due,
(2) you are due a larger or smaller refund,
(3) the IRS has questions about your tax return,
(4) the IRS needs to verify your identity,
(5) the IRS needs additional information,
(6) the IRS changed your tax return, or
(7) the IRS needs to notify you of delays in processing your return.
Tax audits can be broken down into four different types:
Correspondence Audit: This is the least serious type of tax audit. A correspondence audit refers to the IRS request of additional information to verify the accuracy or details of your tax return.
Office Audit: An office audit refers to the in-person interview with an IRS manager to process your audit. To avoid making statements that can be used against you, it's highly advisable to consult with an attorney or a tax professional before you attend the interview.
Field Audit: This is the most serious type of audit because the IRS agents will visit you at home or business. They may ask to see things that are related to the tax you've reported.
Random Audit: As mentioned above, tax returns can be randomly selected for an audit. A random audit is made without any particular reason. The IRS auditor will review the entire tax return to make sure the information was entered correctly.
How To Handle Your Tax Audit
For all types of audits, the IRS begins the audit process by sending a notification letter to the taxpayer. If you've received a notification letter, you should first read the letter carefully. The letter should contain important information, such as the reason why your tax return is being examined, specific steps to follow, and a deadline to reply.
Then, prepare yourself to resolve the issue by researching the law and gathering information. Don't feel rushed to contact the IRS to respond to the letter. Any information you give to the IRS may be used against you. If you need more time to gather information or prepare yourself to respond, you can submit a written request to the IRS by fax or mail to get a one-time 30-day extension. However, if you've received a "Notice of Deficiency" in the mail, the IRS won't grant you an extension.
There are three possible ways of concluding an audit. First, an audit can conclude without making any changes. In this case, the IRS accepts the documents or information you’ve submitted, which results in no change to your tax return. Second, the IRS can propose a change to your tax return, and you may agree to those changes. Third, you may disagree with the proposed change made by the IRS and request a conference with an IRS manager to challenge its assessment.
Taxpayer Rights
Taxpayers have the right to know what steps to take to comply with the tax laws. The Taxpayer Bill of Rights requires the IRS to provide taxpayers with clear explanations of the laws. There are several rights, which apply to tax audits as well. The IRS informs its employees and the taxpayers that the taxpayers have the following basic rights:
A right to professional and courteous treatment by IRS employees
A right to privacy and confidentiality about tax matters
A right to know why the IRS is asking for information, how the IRS will use it, and what will happen if the requested information is not provided
A right to representation, by oneself or an authorized representative
Be Prepared for Your Tax Audit: Call a Tax Attorney
Some tax audits can be simple and some can be extremely complicated. Tax audit representation is necessary only if you're charged with penalties or a possible crime. So before responding to the IRS, you should first analyze the status of your tax return and determine what steps to take to resolve the matter. If you've received a tax audit notification, you're best off contacting an experienced tax lawyer near you.