Most people live in fear of receiving a letter from the IRS informing them that they have been selected for an audit. However, you do not necessarily have anything to fear from an IRS audit. Most people who have been selected for an audit are done so randomly based on an entirely statistical algorithm, which means the IRS will most likely not find anything wrong with your filed returns.
Self-employed individuals are the most likely to be hit with an audit, and it is even more important that they have all the necessary documents to back up what they put on their returns. Those who have mismatched documents or whose returns are involved with others who are undergoing an audit, such as business partners or investors, are also key candidates for audits and may face a more involved review.
Where Does an Audit Take Place?
The IRS notifies you of an audit either by telephone or mail, although you will always receive a mail confirmation even if they initially contact you via telephone. You may have an audit done completely through the mail, or you may have an in-person audit. In person audits may happen at your place of business or in a local IRS office. The best location for an audit is in an IRS office. If your selected audit location is your place of business, you can request a change of location, although it may not be accepted.
What Will the IRS Review?
During an IRS tax audit, the auditor reviews four main areas: income, audit history, previous returns, and penalty history. You will need to have documents for any and all income, including your wages and salary, any sales receipts of asset liquidation, alimony, prizes, pensions, tax refunds, disability, social security, investments, and more. The auditor also looks at your previous tax returns, certain receipts, and other documents. An audit usually goes back only as far as three years, although if they find a substantial error they may go back further.
What Documents are Needed?
In an IRS tax audit, the taxpayer has the burden of proof, not the IRS. This means that it is up to you to have documents that support what you stated on your federal income tax return. The IRS will need to review any and all documents regarding your income, as well as anything that you wrote off or used for a credit or deduction. This may include bank statements, paycheck slips, invoices, receipts, and other information. This is why you should keep all receipts and statements for at least four years. The IRS will inform you of the specific documents you need to bring for the audit. Some documents may be accepted electronically, while others will need to be in paper.
What Questions Will Be Asked?
The auditor will evaluate the documentation to ensure that a myriad of questions are answered. Examples of the questions include:
- Are all sales and receipts properly reported?
- Were any personal expenses written off as business?
- Does the lifestyle seem to exceed the income reported?
- Were any travel or entertainment expenses incorrectly written off for business?
The Possible Conclusions
You may find three conclusions to your audit: no change, agreed, and disagreed.
- No change: The review finds no changes in your files, as you have substantiated all documents that were reviewed by the auditor.
- Agreed: The IRS finds something requiring changes, and the taxpayer understands and agrees to the proposed changes.
- Disagreed: The auditor finds changes, the taxpayer understands the changes but does not agree to them.
If you agree to changes, you will most likely be paying an additional tax bill that may include interest or penalties. If you disagree with the findings, then you can appeal the decision. During the appeal procedures, your tax bill will still accrue interest, but most people continue because of the savings if their appeal is concluded to their advantage.
Receiving a notice of audit can be scary, but you most likely have nothing about which to worry. The tax professionals at Fidelity Tax Relief can help you prepare for a tax audit and communicate with the IRS so that you do not have to worry. Contact us to see how we can help you with this and other federal tax issues.