If you are one of the millions who filed their return in April rather than requesting an extension to October, you can now sit and relax because you have filed and paid your taxes on time. However, many taxpayers never fully relax, as they sit around with a fear of receiving an audit notice from the IRS. For most people, this fear is largely unfounded, since the IRS only audits roughly 0.7 percent for individual tax returns, based on the 2016 data.
However, you may still be one of the unlucky over 1 million people who do receive an audit notice from the IRS. The IRS will always notify you by mail. Knowing how to respond can help you to reduce the chance of a negative outcome of your audit.
The Low Down on Audits
The IRS audits people for a variety of reasons. Most of the time, it is completely random or your return is chosen because a computer algorithm found aspects of your return that are different than the “norm.” You may also be selected because the IRS is auditing someone connected to you, such as investors or business partners.
The audit itself will take place either through the mail or through an in-person interview. During audits, the IRS reviews your tax return and looks at your records (such as receipts, account statements, financial records) to check for any potential mistakes or inconsistencies, and you may end up owing more taxes than you originally thought. You also are charged with penalties and interest on the tax that you did not pay, despite making efforts to be compliant.
Step 1: Read and Understand
The first step to take upon receipt of an IRS notification is to read the letter and understand what it means. The IRS must clearly communicate what is going on. The letter will detail what actions you need to take and by what date.
Sometimes, you may receive a letter that states the IRS made an adjustment on your tax return. This does not mean you are under audit. You may still need to take action, such as pay an additional fee or appeal the decision if you feel it is in error. At times, this adjustment might be to your favor, and you will receive a refund.
Step 2: Contact a Professional
It helps you to work with a professional during an audit, especially if you are not very familiar with taxes. If you had an accountant or professional tax preparer prepare your return, start by connecting with them. Many professionals have some type of audit defense as part of their services, although they may charge a surcharge.
If you prepared your return yourself and want to work with a professional, then look for CPAs, enrolled agents and tax attorneys, which mean that they have unlimited rights to represent you even if they did not prepare the return for you.
Even if you do not think you can afford to work with a professional, you may find that a single meeting or a free consultation can give you initial guidance to help you. You may also find some services that provide more cost-effective audit defense than working with a tax attorney or CPA.
Step 3: Gather Your Documents
Whether you go it alone or work with a professional, you will need to gather all of your documents. The most important documents you need are those detailed on the letter from the IRS. This may include receipts, account statements and other support for the income statements, deductions, credits and other statements on your tax return. You may need documents for as far back as three years, which is the time limit in which the IRS usually audits someone.
Step 4: Expect a Lengthy Process
The audit process does not happen overnight, even if you meet in person. The IRS agent will need to review the documents and make a decision. If you do it through the mail, it will take more time. The IRS may send additional correspondence to you and you may need to take action.
During this process, it is important to respond as quickly as possible when you receive any correspondence. Additionally, do not let your emotions or fear guide you. Treat the agents with respect and ask for time to review things if you need to. Working with a professional can also provide an agent to work on your behalf that can objectively perform.
Step 5: Appeal the Decision if You Have Cause
You have the right to disagree with the decision the IRS comes to and take action. You can request to talk with a manager at the IRS or you can enter mediation. You also have the right to appeal the process. There are many steps you can take to appeal a decision, although it does not always mean that it will ultimately go your way. If you do plan to appeal the decision, it is best to work with a professional to increase your chance of a successful appeal of the decision.
An audit is never a fun experience, but they do not always end up with devastating consequences. You may end up with no change, especially if you do have the support to substantiate everything on your tax return. You may just have slight changes that leave you with a small tax bill. There is always a risk that you will have a high tax bill that you cannot afford. If this is the case and appealing the decision does not work, then you may qualify for one of the tax relief options from the IRS, such as Penalty Abatement, Installment Agreement, or Offer in Compromise.
If you need help with handling a tax bill or an audit, contact Fidelity Tax Relief at 877-372-2520. We can help negotiate tax relief or provide you with audit representation. Talk with one of our tax professionals about your situation, and we will discuss options with you.