The IRS has three years to audit tax returns. This means that you might not be in the clear even if it’s been a few years since you filed a tax return and you haven’t heard from the IRS. Generally, the IRS will audit an account if it finds a significant understatement of income. If it does, then it could look back even further than three years, though not by more than six. But what do you do if the IRS selects you for an audit? What can you expect? And what does it mean?
Why was I audited?
The popular myth about IRS audits is that you did something very wrong, or illegal, and now you need to be afraid. In the vast majority of audit cases, this is simply not true. Usually, most people only need to respond to a few questions. Other times, you were selected at random. You can ask the IRS why your return was selected. Your taxes can be audited for a variety of reasons, such as:
- Specific activity on your return—such as large expenses or items that are inconsistent with previous years, such as a significant drop in income.
- Related examinations—you may have entered into transactions with someone else who is being audited.
- Automatic flags, where computer programs find outlying “scores” on returns—for example you have above average withholding, fail to report income, have large charitable contributions, or your business expenses equal your business income.
- Random selection.
What can you expect?
First, you will receive notice on official IRS letterhead. All IRS notices or letters contain a notice number in the upper right-hand corner. That number will let you know what the specific issue is with your tax return. The IRS will never call you to initiate an audit or to demand to collect taxes, so be wary of anyone calling you that asks about your tax returns.
The notice will also tell you what returns will be audited and whether it will be by mail or through an in-person interview. If it is an interview, then you may have to go to an IRS office or the IRS will meet you at your home, place of business, or your tax preparer’s office if it is a field audit.
The IRS letter will request the information it wants to examine, like bank deposits or receipts. Make sure to read all of the provided instructions on how to contact the agency and look for the date that you need to reply. If you need to send documents to the IRS make sure that they are organized in a clear and understandable manner.
You can then proceed with an audit in three ways: 1) attend it personally, 2) bring a tax professional along with you, or 3) hire a tax professional to go in your place.
What should you do?
- Determine how you’re being audited – there are four different types of audits, each with their own requirements. These are:
- Correspondence Audits: The IRS wants more information about a part of your tax return, like receipts or checks.
- Office Audits: For this one you’ll bring requested documents to your local IRS office.
- Field Audits: An IRS agent comes to you to conduct the audit in person.
- Taxpayer Compliance Measurement Program Audits (TCMP): this is the most extensive kind of audit. Every single part of your tax return will need to be substantiated by documents, including birth and marriage certificates. These audits are rare and are performed so that the IRS can gather statistical information.
- Gather your documents
Once you know what is expected of you, you can start going through your records to find the relevant receipts and documents. Make sure that you send copies – never send in your original documents, and limit your production to exactly what is requested. If you can’t find something, immediately, do your best to obtain a copy of it. The IRS will not give you credit for records that are missing or lost.
- Get a Tax Lawyer
As soon as you are notified of your audit, contact the tax professional who prepared your return. If you don’t have one, are still nervous about your audit, or are involved in a field audit, it’s a really good idea to get a tax lawyer who can explain the process and help you get prepared. Being organized shows the auditor that you are a responsible taxpayer, and might make the agent limit the scope of their investigation.
Once you have completed your audit, the IRS will determine whether you owe additional taxes. If this happens, then the IRS Collection Process will begin. You will get a bill that tells you what you owe, including any interest and penalties. If you don’t pay, then you’ll get another bill. And, if you still don’t pay, the IRS will begin collection proceedings. If you cannot pay the amount you owe immediately, you should consider whether you might be eligible for one of the IRS’ collection alternatives.
At Boeshaar Law, we help individuals and small businesses solve their IRS problems. If you have received an IRS audit notice and you want help to figure out your next steps, don’t hesitate to contact us today.
Robert V. Boeshaar Attorney at Law, LL.M.,PLLC
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