IRS Audits: What to do when you receive an IRS tax audit notice
IRS Audit Process
It is important to understand the IRS audit process and how tax returns are selected for audit. The IRS has three years to audit a return after the due date. Generally, the IRS can include returns filed within the past three years in an audit.
Additional years can be added if a substantial error (typically more than 25% of gross income) is identified. They have six years to audit if a substantial error is found such as fraud. However, audits generally happen two years after filing. Why so long? It takes a while for the many filings to go through and for the IRS computers to process them.
The IRS audits by use of the discriminate information function system or DIF. Basically, if a taxpayer’s financial data on their tax return differs from others in their peer group, they will receive a high DIF score, and therefore a higher chance of being selected for audit.
Selection of a certain tax return for audit runs the gamut. There are no absolutes that will trigger an audit. However, some are suspect such as travel and entertainment expenses, home office expenses and high donation amounts.
Despite what many may think, an IRS audit can occur whether or not:
- your return is prepared and filed by a professional
- your return reflects low to moderate income
- your return reflects no certain deductions or credits
The IRS tax audit notice should not be feared. It is simply the IRS’s way of saying, “we question the information on your return regarding income, expenses, losses and certain deductions you are taking, so let us know where you got all of this information.” The IRS is not saying you have done anything wrong. The problem becomes when you don’t have any of these records to show where the information on your return came from. It is essential to keep good records and documentation.
Types of IRS Audits
There are four types of audits:
1. Initial Compliance Center Audits—this is conducted when you first file your return. It ensures that all information matches with the information on record with the IRS. If it does not, a more thorough audit will be conducted.
2. Correspondence Exam Audits—audit conducted by mail and is the most common type of audit.
3. Office Exam Audits—requires the taxpayer audited to go to the tax auditor’s office. They generally can last four hours or less.
4. Field Exam Audits—comprehensive tax audit that takes place at the taxpayer’s place of business. It involves hours of intense review and verification.
Responding to an IRS tax audit notice – how should I reply to an IRS TAX audit notice?
Once you receive an IRS tax audit notice, you should take the notice seriously and respond within the allotted time frame with the information requested. Generally, you have 30 days to respond, however, extensions may be granted by the auditor if requested.
Be thorough and respond as honestly as you can. Be sure not to volunteer information outside the scope of the audit examination. This may lead to expansion of the audit into different areas and even different years.
Keeping good records is always advised in case of an audit. By law, the IRS requires each taxpayer to retain records used to prepare a tax return for three years from the date the return was filed. Types of paperwork to keep include all types of proof of payment such as credit card receipts, sales invoices, cancelled checks and bank statements. Mileage logs are also extremely important if you plan to claim mileage deductions.
IRS Tax Audit notice outcome – what are the outcomes of an IRS TAX audit notice?
There are 3 basic outcomes in a tax audit:
1. No change
2. Agreed upon changes between taxpayer and IRS auditor
3. Taxpayer disagreement with changes made by the IRS auditor
If you do not respond at all, the IRS changes will stand and you will be responsible for those changes. If you cannot afford to pay off the tax debt resulting from the tax audit, it is wise to hire a tax attorney to assist you with resolving your tax debt with solutions such as an offer in compromise or IRS payment plan.
Rights during an IRS tax audit
To ensure fair treatment during the IRS audit process, it is important to know your rights. Publication 1. Your Rights as a Taxpayer, explains your rights as a taxpayer as well as the examination, appeal, collection, and refund processes.
These rights include:
- 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.
- A right to appeal disagreements, both within the IRS and before the courts.
Download the full IRS Publication 3498-A, The Examination Process (Examinations by Mail)
Definitely review The Examination Process found in IRS Publication 3948-A prior to your tax audit. To help you understand your rights and to represent you in a tax audit, it is smart to hire a tax attorney. The San Diego Tax Attorneys at Delia Law have many years of tax audit experience and will competently represent you before the IRS. Please call for a no-cost tax attorney consultation at (619) 639-3336. We look forward to helping you.
This IRS Tax Audit blog post is not intended as legal advice and should be considered general information only.
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