There are few instances as threatening as being audited by the IRS. No one looks forward to it. It’s also one of those situations that you believe will always happen to other people. Until it happens to you and you start to lose your bearings.
Some of you might be thinking, “Well, what are the chances of me being audited by the IRS?” According to the agency, only 0.6 percent of individual taxpayers were audited from 2010 to 2018. This led to an additional tax recommendation of over $17 billion.
So, an IRS audit is not a common occurrence. But, it could happen to you, and therefore, it helps to know more about the procedure.
What it means to be audited by the IRS
The objective of an audit is to determine whether you disclosed all the necessary information and whether or not you paid the right amount in federal taxes. Through an audit, the agency will determine whether your reported earnings, expenditure and other necessary information are correct.
To put it simply, an audit is how IRS finds out whether the information you gave is accurate. If the information is accurate, there’s nothing to worry about. If they find any discrepancy, they’ll readjust your returns and you might also have to pay penalties.
What happens in an IRS audit?
During the audit, IRS agents will conduct a thorough examination of your financial accounts, books, records, documents, vouchers, expense bills, and more.
The agency’s queries need not be limited to your finances. You may also have to disclose non-financial information if it would help them determine the accuracy of your financial situation.
Are all IRS audits the same?
Not all audits are alike. There are different kinds of audits that you could be subjected to, depending on the circumstances. These include correspondence audits, office audits, and field audits.
The most common form of IRS audits is the correspondence or mail audit. It’s also the easiest one to deal with. If you get a notice stating that you’ll be subjected to a correspondence audit, there’s little to worry about. The same notice will also state what documents you’ve to send the agency and where to mail them.
These documents are usually proofs of certain deductions or credits you would’ve listed on your tax returns. These include copies of receipts, checks, or other documents that support your filings. Of course, if you don’t have the supporting documentation, it could lead to tax return adjustments, penalties, and possibly even further auditing.
When mailing, ensure that you use certified mail to confirm their delivery. Also, make it easy for the agency by organizing them by year. You can also add a brief description of the documents.
Earlier, the majority of audits were in person. But budget cuts have forced the agency to rely on correspondence audits wherever possible.
The agency will first notify you via mail that they will be conducting an audit. You’ll also receive Form 4564, also called an IDR (information document request). After that, you’ll have to attend an initial interview at an office in an IRS building. This is an opportunity for you to explain and present your case.
If the auditor isn’t satisfied with the information gathered during the interview, it could lead to more IDRs and office interviews. Once the entire procedure is complete, depending on their analysis, you may have to pay adjustments on your returns and even penalties.
Now, this is where things begin to get serious. A field audit is more intrusive than an office audit because it can take place in your residence or business. If you’re in this unfortunate situation, you need to keep a few things in mind.
To begin with, the IRS needs a court order to enter your residence. You have the power to deny them entry if they don’t produce the order. But don’t be confrontational. If they’re at your residence with a court order, it’s to review the information you would’ve provided.
For example, if you claim a home office tax deduction – especially in the age of remote work – the agency may need to inspect it. If you deny them entry, your tax deduction will be denied.
Secondly, the IRS always notifies before a field audit. This gives you time to prepare your documents. Finally, it’s always a good idea to have a tax professional or legal advisor by your side during a field audit.
Filing for an appeal
After an audit, there could be adjustments in your tax returns and you may have to pay fees and penalties. But this isn’t the end of the road for you. You can contest their decision and file an appeal. If you decide to appeal, a representative from the IRS’s Office of Appeal will consider your case at a hearing.
The process usually takes several months. In most cases, the representative will contact you over the phone. But you can request a face-to-face meeting to present your case. If the Office of Appeal rules against you, you can file an appeal at the U.S. Tax Court.
Will an IRS audit result in criminal charges?
If any discrepancy is due to an honest mistake, you shouldn’t expect any criminal charges. So, it’s highly unlikely that you’ll have to do any jail time due to an IRS audit. That’s reserved for serious cases of tax fraud that usually start at about the $70,000 mark.
With the right professional advice and preparation, there’s nothing to fear about an IRS audit.