The IRS takes notice of any circumstances within your federal tax return which may be indicative that something is wrong. These IRS warning signals, also called red flags or major triggers, may be a genuine mistake on your tax filing or simply something the IRS finds suspicious.
Not all of their concerns are substantial but they must investigate them nonetheless. If your tax return draws the attention of the IRS, it is likely they will audit you. Whether you’ve been audited and are unsure of what steps to take next or you need legal tax advice in general, be sure to consult with an experienced federal tax attorney.
What Is an IRS Audit?
An audit generally comes in the form of an IRS notice the agency is requesting your compliance with an evaluation of your tax return. The evaluation generally includes inspection of all relevant tax and financial records that were used to support your tax return. And the goal is to ensure you are complying with the tax laws.
Before the actual audit, you will most likely receive an IRS letter that simply questions part or all of your tax return, which can span more than one year. You may review your tax return and agree the error was fully your fault and address it with the IRS by checking that you agree with their changes. The other option is to disagree with the IRS’s assessment and provide them with additional or clarifying information concerning the specific items at issue.
In protesting an audit, depending on whether it is a correspondence audit or in-person audit, it can be done by phone, mail, or if you hire a federal tax attorney, they can represent you through the audit by working with the IRS on your behalf. Failure to respond quickly and thoroughly to their initial questions can lead to other issues on your tax return to be audited or additional years added. And even worse, if you fail to respond, they will assess the tax debt to you and start IRS collection activity such as levying bank accounts, garnishing wages and filing tax liens.
Types of Audits
A correspondence audit is when the auditing process is conducted entirely through written mail. The IRS will mail you an initial notice requesting certain documents to support a deduction or other item on your tax return you claimed that simply doesn’t “match” with IRS records. Some taxpayers get scared and simply pay off what the IRS proposes to assess and depending on the amount, it may be best to do so as audits can be expensive when having to hire a tax attorney. However, if a lot is at stake, it is worth it to hire an experienced and knowledgeable tax attorney to present the proof in writing to substantiate your tax return(s), prepare memos with skilled legal argument as to why the IRS is wrong and to protect your legal rights as a taxpayer along the way.
The second type of audit is an office audit. This is a full-fledged audit and relatively more serious audit than receiving a notice. The IRS will want to interview you in person about certain items on your tax return.
They will send an audit notice requesting your presence at a designated IRS office on a set date, which is possible to reschedule for your convenience. You can choose to bring a tax professional with you to your office audit for representation.
The next type of audit is very rarely issued. A field audit is a step up in seriousness from an office audit since an IRS agent comes to you. The agent may arrive at your residence, place of business (when you are the owner), or your tax accountant, CPA, enrolled agent or tax attorney’s office. This type of audit is not limited to specific items on your tax return. It’s wise to have an experienced tax attorney with you during this type of auditing process.
What Factors May Cause a Tax Audit from the IRS?
These are some common circumstances or red flags that cause the IRS to audit:
- There’s a mistake on the tax return you filed. It’s not uncommon for you, or whoever has filed your taxes, to make a mistake.
- Errors such as providing an incorrect Social Security number or failure to use exact dollar amounts on your federal tax return may result in an audit, however, most of the time, the IRS can change it for you. If they don’t, simply respond to what they are requesting of you via CERTIFIED MAIL and follow up to make sure they receive.
- Withheld income. If there is a discrepancy on your tax return regarding your income, you are likely to be audited. The IRS receives copies of your W2s and 1099s when you do so they will issue an audit if information on your tax return does not match their records.
- If you fail to respond to the audit notice, you can potentially receive a Notice of Deficiency, a 90-day letter.
- Large donations to charity. If you’ve made a contribution exceeding $250 to a charity organization, the IRS may audit you.
- If you’re regularly making large donations, it’s advised to keep detailed records including an itemized listing of all charitable donations.
- Substantial business expenses. The IRS takes notice of businesses who report larger expenses than other businesses that are similar.
- A major indicator is the purchase and use of a vehicle that’s listed as a business expense. If you’re using a vehicle for both personal and business travel, be sure to log each category separately. But above all, try to avoid the audit with a skilled at tax attorney.
- Reported business losses. If your business never makes a profit, the IRS is likely to be suspicious and audit you. If you report losses for several years in a row (generally three), it’s considered a major red flag.
Who Is Most Likely to Be Audited?
Typically, poor and wealthy individuals are the most likely to be audited. Taxpayers who earn $25,000 or less annually or those who earn $500,000 or more in a year apply to this. Individuals who earn $10 million or more per year make up the highest percentage, up to 6% of taxpayers in this bracket, of audit examinations.
The IRS is also likely to audit for potential fraud in individuals who are, or claim to be, awarded the Earned Income Tax Credit (EITC). EITC is a hot topic right now. For 2024, it provides a tax credit ranging from $600 to $7,430, depending on tax filing status, income and number of children. The eligibility criteria for the EITC can be misleading which leads to many people unintentionally to claim the tax credit inaccurately.
Taxpayers least likely to be audited are those who earn between $100,000 and $200,000 each year. The majority of taxpayers in this bracket elect to take the standard deduction over more involved itemized deductions and other credits. These taxpayers also generally have a W-2 or 1099 from their employer that is easy for the IRS to verify.
Time Restrictions on Audits
Some audits don’t occur until a pattern develops over multiple years which finally presents in the form of a red flag, requiring the IRS to investigate further. But how far back can the IRS audit past tax returns that have long since been filed?
Tax return audits generally happen to tax returns filed within the last three years. This standard three-year limit can be extended to six years if certain circumstances occur.. The IRS typically aims to address audits as quickly as possible. However, if a matter is not closed within the allotted time period, the IRS may request more time. Sometimes an audit can be extended by multiple years, if you agree by signing an extension, granting them extra time. If you decline the IRS’s request, you will almost certainly be given a tax bill. Be sure to consult with a tax attorney as to whether or not to extend.
Lastly, it should be noted that there is no statute of limitations for a fraudulent tax return.
What to Do if You’re Being Audited
In order to resolve an audit, you must either address all of the IRS’s concerns in full, agree or disagree with their proposed assessment. To address the IRS’s suspicions, you may clarify items on your tax return by corresponding with them and/or providing additional financial information.
If you choose to agree with the IRS’s suggested changes to your return, you must declare so by signing their report and sending it back to them. You may also owe additional tax payments.
The final way to close an audit is by disagreeing with the suggested modifications to your tax return. This can be done by requesting to meet an IRS manager or by filing an appeal. If you are found to be guilty of the discrepancies pointed out by the IRS, you can still choose to appeal. It’s recommended to consult with a qualified federal tax attorney if you’re struggling to understand the IRS’s reasoning or in providing convincing evidence.
Do Not Ignore a Tax Audit or Other IRS Notices
It is never advised to ignore or delay responding to notices from the IRS, including if they request an audit examination. Failing to work with the IRS regarding an audit of your tax return can have serious consequences. The IRS is able to impose penalties in addition to requiring you pay the tax debt and interest they have found you to owe.
The most common penalty is for accuracy-related issues with your federal tax return, such as if you understate the amount of tax you owe. The IRS mandates that you also pay 20% of the tax discrepancy.
Avoid Unnecessary Penalties and Audits by Having a Tax Attorney Assist You
Educated and experienced federal tax attorneys at Delia Law can help you if you were audited or received another IRS warning notice. We understand how overwhelming taxes can be for a lot of taxpayers. This is why we are dedicated to helping clients avoid unnecessary distress. Schedule a consultation with us today.
