As a full service tax resolution firm, we’ve seen and defended more than our fair share of IRS audits since we opened up our doors.
But after thousands and thousands of tax audits, we know that your first tax audit is going to be scary. There’s no way around it. And a large reason for that is the fact that most people don’t have a particularly good understanding of what a tax audit is and how IRS audits work.
You can see how this could cause problems. First, you get a letter in the mail from the IRS letting you know that you’re being audited, which sounds worrisome and ominous, but then you’re left not really knowing what comes next. Does an auditor show up? Will you be accused of a tax crime? Is the IRS going to take your house?
Allowing these questions to spiral out of control will only leave you stressed out and unconfident when you try to deal with your tax audit. Or worse, it will drive you to not deal with your tax audit, which can potentially lead to tax debt or lingering tax issues with the IRS. Yes, dealing with the IRS can be scary. But it gets a heck of a lot less scary when you know who you’re dealing with and what you’re dealing with. We’ve dealt with everything from the simplest tax audits to complex tax audits for small businesses and large companies. We’ve really seen it all.
IRS audits are uncommon, but they’re still a potential part of your life as a taxpayer. While you should take your tax audit seriously, there’s no need to be afraid.
At StopIRSDebt.com, we believe you should never have to feel that worried about your tax audit. In this article, we’re packing in every last bit of info we can about IRS audits, from what causes them to how they work, what happens during an IRS audit, how you can prevent them, and how you can stop a tax audit. We’re also including a list of IRS audit FAQs to ensure your questions are answers before you even have to ask them.
What is an IRS audit, really? Well, let’s start out with a simple explanation and work from there.
A tax audit is really just a careful review of your tax return to see if everything is correct, or if there are errors that need correcting.
That doesn’t sound so scary, does it? And it shouldn’t be! People interact with audits every day. The director of a non-profit might audit a list of donors, a restaurant manager might audit their freezer to determine their next food order, and you might even audit your own bank statements to see if you’re still being charged for a streaming service you thought you canceled! For some reason, the word “audit” just takes on an entirely different tone when the IRS gets involved.
However, most IRS audits are actually very simple and very easily resolved affairs. Of course, that doesn’t mean all IRS audits are simple affairs. They can get a lot worse. (More on that later.) But at their core, IRS audits are the official process by watch the Internal Revenue Service double-checks tax returns that they suspect may have an error, omission, or other tax issue.
For example, you can even resolve your audit by mail. Here’s a video from the IRS on the very subject.
The auditing process can be as simple as sending an amended return and as complex as an in-person audit that spans several weeks. However, you won’t know exactly what your tax audit might entail until you receive your audit letter and enlist help from a professional who can walk you through the process.
For now, we’ve got you covered with the essentials about how IRS audits work. Start with this chart, and then let us break things down into the fine details for you afterward.
This chart offers a high-level look at the steps to an IRS audit. We’ve broken down these steps below.
An IRS notice will serve as the first sign of your tax audit. (They won’t contact you by phone, so if you receive a call about a tax audit, beware: It could be a scam.)
This audit letter will provide the basic info you need to understand you’ve been audited, and they may request you provide additional information about certain items on your tax return. They’ll also provide contact info and instructions for what you should do next.
When the IRS contacts you, you should always respond. Not responding runs you the risk of seriously worsening your situation with the IRS, whether the IRS audits you or you have serious tax debt.
In some cases, your response to the IRS may simply include the information they requested. For example, you may not have included a specific document that they’d like to review. Your response, sending that document, may handle their request entirely and effectively serve as your audit.
IRS audits can take place by mail or in person at an IRS office or at your home, business, or accountant’s office. A tax audit performed at an IRS audit is called an office audit, while an audit that takes place at your home or business is referred to as a field audit.
This step is when the auditor will review your records, which could include financial documentation surrounding your income, expenses, or other itemized deductions. Whether your audit is conducted by mail or in person will probably depend on the issues in your audit. Don’t worry, we’ll cover everything else below.
The IRS says that audits can be concluded in three ways:
Should you agree with the findings of the audit, you can sign the examination report or whatever documentation the IRS provides to confirm that you understand and agree with their findings. In the case the IRS determined you owe more money, you can usually set up some sort of payment plan to handle collections.
If you disagree with the audit findings, you can request a conference with an IRS manager. You may also deal with mediation or file an appeal should you choose. Neither option guarantees the IRS will reverse its decision, but the options are on the table—and they’re a part of your rights as a taxpayer.
Most taxpayers hold a pretty frightening impression of what an IRS auditor looks like, and we can’t blame them. Tax audits are scary enough, so the IRS auditor carrying it out might as well be the boogeyman. However, it’s important to remember that an auditor isn’t out to get you. They’re simply aiming to carry out the audit process, whatever that process may yield.
IRS auditors, or revenue agents, work a lot like accountants do. Revenue agents primarily perform audits of people, businesses, or nonprofits. Unlike their counterparts, revenue officers, who deal in collection and enforcement of serious tax debts, IRS revenue agents focus on three major things:
Curious to learn a bit more about the role of the revenue agent? Take a few minutes and watch this interview to find out more:
You know what a tax audit is and how tax audits generally flow, but we’ve really only scratched the surface of IRS audits. In fact, there’s a good chance we haven’t covered your most pressing questions. The first step to successfully getting through your first audit is to clear up any misconceptions you may have about audits and get the info you never had in the first place.
Nobody wants to be audited by the IRS, but it happens. However, there are a lot of misconceptions floating around about what triggers an IRS audit. For example, selection for an audit doesn’t necessarily mean you’re in the wrong—or that you’re in trouble with the IRS.
In most cases, a computer will be the most likely reason your tax return is audited. Yeah, it isn’t some buttoned-up auditor shut away in a cramped office pouring over your tax return! Instead, the IRS uses statistical formulas to spot the tax returns that stick out from the pack in a potentially bad way. This typically means comparing each tax return to the “norm” for similar returns.
EXAMPLE: You file a tax return under the single filing status, and you only have one income stream. However, you also have a few investments in brokerage accounts that earned dividends in the last year. The IRS will run your tax return through its system, which will automatically compare it to the tax returns similar to yours. If your return stands out in a particular way from the rest of the pack (e.g.- your dividends were low or you took an abnormal number of tax credits), you may potentially be audited. It doesn’t mean anything is wrong; it just means that your tax return wasn’t normal.
Don’t believe us? Here’s some additional information about how the computer review auditing process works. (Please excuse the retro look of this video.)
In other cases, you can be audited because you were financially linked to another taxpayer or business, which also went through a tax audit. Even if their audit was triggered due to abnormal numbers compared to similar tax returns, it can still put your tax return into question.
EXAMPLE: Among other business expenses listed on your taxes, you list the costs associated with one of your company’s vendors. Unfortunately, due to some miscalculations on the part of your vendor’s accountant, the IRS audited them. Now their books and associates are under even greater scrutiny, which may lead to the audit of your business. This nasty audit surprise can happen even if you’re just an investor in a business, and not a business partner.
Even the most organized, punctual taxpayer might still end up being audited at some point or another in their life. Fortunately, there are a few simple actions you can take which will reduce the likelihood that you are ever audited.
Yes, simple calculation errors can lead to unfortunate run-ins with the IRS. Remember, usually your tax return will be run through a computer program designed to spot problems. So, an un-dotted I or un-crossed T may just land you in the middle of your first audit.
Whether or not you’re using tax preparation software, you should always be checking to ensure the numbers on your tax return match the numbers on your tax forms. If every piece of information accurately reflects your tax documents, there’s a good chance you’ll have avoided the simplest causes of an IRS audit.
Especially when you’ve recently experienced a life change, it’s easy to forget to include an income stream or other taxable account on your tax return. However, the IRS has an additional record of your income from your employer, bank, or broker, and if you fail to report your income, they may just audit you to check.
When you’re preparing for tax season, it’s good practice to make a list of all the tax-related totals you may need to include when filing your tax return. Cast a wide net, and include everything from your income to your investment accounts, as well as your bank accounts and any donations you’ve made or deductions you plan to take. If something may tangibly impact your tax obligation, then it needs to make its way onto your tax return.
Since a tax audit is the only time most taxpayers will ever have to deal with the IRS outside of tax season, there are many frequently asked questions that arise about audits. We’re going to ask and answer a handful of them to help save you time.
Our fear of being audited by the IRS really isn’t too different than our fear of sharks. Most people will never even see a shark in the wild in their lifetimes, much less be attacked. Nonetheless, we remember Jaws and many people are unwilling to set foot in the water when they visit the beach.
Similarly, there’s a very slim chance you’ll be audited. In fact, the breakdown of audits from the fiscal year 2017 was 0.6% of all taxpayers. So, if you’re one of 166 out of 167 tax returns, you weren’t audited. Pretty good, right?
Absolutely! Most taxpayers do not get audited, and unless you’re a high-income taxpayer, your numbers are even lower than that! For those earning over $10 million, your number jumps up to 6.66% likelihood of being audited, which isn’t even as high as some years in the past! So while you should be careful when filing your tax return, you should also be realistic: It’s unlikely you’ll be audited by the IRS unless you make a serious mistake or intentionally hide information.
We’ve all had that moment. You know, the moment you realize you left your wallet in your house or locked your key in your car. We all make mistakes, and fortunately, the IRS is fairly understanding as long as you take steps to correct them.
If you’ve made a mistake on your tax return—like forgetting to add an income stream, neglecting to add a receipt for a deduction, or blanking on a credit you should have claimed—you can fix it. In these cases, you simply need to file an amended return, which you can do fairly easily. Assuming you filed using some variation of the 1040 form, you can simply file the 1040X to claim additional deductions, credits, or correct errors on your return. When it comes to stopping an IRS audit before it even starts, this method can’t be beaten.
To defend yourself during a tax audit, you should keep a few things in mind. First, you have rights during an audit, so it’s good to remember that while the IRS isn’t necessarily lying to you, they’re certainly hoping to frame things in a way that encourages you to comply.
To begin with, don’t over-explain yourself. When you’re nervous, you will have a tendency to elaborate and talk too much. Anything you unintentionally disclose may end up being used against you. However, you should be honest and forthright with regards to any questions they ask of you.
Additionally, you should keep your discussion to the specific year the revenue agent has come to audit. They may ask to see other, previous years’ tax returns, and that may well help their review, but unless they’re actively reviewing those years, they technically don’t need to review them. You should bring all documents related to the year or years outlined in your audit notice and be prepared to provide them.
There are many legitimate reasons why you may not successfully defend your audit, but it happens all the same. Fortunately, failing to defend your audit doesn’t spell the end of your case. You can always make an appeal.
And many people do! The appeals process isn’t just used in response to audits; taxpayers use appeals to contest everything from tax liens and wage garnishments, and even rejected offers-in-compromise. You have the right to formally disagree with decisions made by the IRS—and to challenge them. Now, that doesn’t mean your case your appeal will sway the IRS’s decision. But if you hire a tax representation firm, you should be looking for a team that will advise you on the best step forward. Should that be an appeal, that needs to be a step they’re willing to take on.
If you find yourself in the middle of an IRS audit, you have every right to feel concerned. But you shouldn’t feel scared, worried, or overwhelmed. With the right information and tax team, you can confidently navigate your tax audit and defend yourself against the IRS.
When the IRS audits you, they aren’t out to get you. More likely than not, they’re just following up on a computer’s recommendation to see what in your tax return does—or doesn’t—line up with the records. If you’re worried about dealing with your tax audit, remember: You don’t need to go it alone. Send us a message using our free live chat and we’ll get you the help you need today.
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