Going through an IRS audit is no day at the park.
You’ll have to dig up old records, make your case to an IRS agent, and afterward, it could be for nothing if the IRS decides to stick you with a bill for back tax debt. In this case, knowing the IRS auditing process is important. It can help you avoid an IRS audit in the first place, give you an idea of what to expect, and help you pursue the right course of action after it’s all over. The IRS audit process includes just how the IRS decides who gets audited, the actual audit, and the options taxpayers have afterward.
First, the IRS audit process begins with its selection of who to audit.
Multiple red flags can lead to someone getting audited. First, the IRS has lots of interest in certain financial transactions, like currency exchanges. Your bank might report them, even if you don’t.
Also, transactions involving large cash payments may also get reported to the IRS. Typically, cash payments exceeding $10,000 get reported, usually by car dealerships, casinos, and banks.
Underreported income is a serious red flag that will grab the IRS’s attention. The IRS pits its Automated Underreporter Program on the frontlines of detecting tax fraud. It compares the income you report with payments made to you reported by third parties. If there’s a difference, that discrepancy will lead to an IRS audit.
The second part of the IRS auditing process is the actual audit.
Only about 5 percent of IRS audits result in an IRS agent knocking on your door. A field audit usually happens if the audited person or business makes more than $100,000.
Because the IRS is typically understaffed, most audits performed via paper, also known as correspondence audits.
With a correspondence audit, the IRS normally asks you to provide documents to support what’s reported on your tax returns. This could be anything to support tax credits, deductions, or something to show that you’re eligible for the Earned Income Tax Credit, a frequently abused credit.
Some IRS audits can require you to make an appearance at an IRS office. With an office audit, you’ll meet with an IRS agent, and he or she will let you know what documents to bring.
If you go through a field or office audit, you can make an audio recording of what’s said, so long as you give advanced notice. You may also be able to change the IRS office for convenience purposes.
One important avenue to take while undergoing an audit is hiring a tax attorney. Your tax attorney can represent you, or be with you during an office or field audit. But, your tax attorney will need written authorization if he or she represents you while you’re not there.
After the audit is complete, you’ll then have the option to appeal.
Usually, you’ll be given a rundown of the appeals process once the audit begins. Appeal options range from a meeting with the IRS agent’s supervisor, or taking your case to U.S. Tax Court.
If you elect to have a meeting with a supervising IRS staffer, you’ll have a month to figure out your next move if your meeting ended without any agreement. Otherwise, you’ll receive a notice of deficiency, and an accompanying 90 days to file a petition in tax court.
You don’t have to pay the tax if you want to appeal your case in tax court, and you can even appeal a tax court’s ruling to an appeals court if it decides to hear your case. For that, you’ll definitely want to consider hiring a tax attorney.
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