An IRS tax audit can be very scary even if you know you filed your taxes correctly. News that the IRS has decided to take a second look at your taxes is never fun. What is an IRS audit and what should you do when you are audited?
The IRS defines a tax audit as:
A review/examination of an organization’s or individual’s accounts and financial information to ensure information is being reported correctly, according to the tax laws, to verify the amount of tax reported is substantially correct.
Very few tax returns are audited. In 2015 the IRS audited less than 1% of all tax returns – 0.84%. With the odds heavily against, how did you get chosen for an audit?
IRS Tax Audit Selection
The IRS uses a few factors to determine which tax returns to audit:
- Random selection – The IRS uses a statistical formula to select tax returns to audit even if the tax return shows no errors.
- Document matching – When information on a tax return does not match the records such as a Form W-2 or Form 1099
- Related examinations – If the IRS is performing an audit on another taxpayer that is related to you, like a business partner or investor, they might also decide to audit your tax return as well, especially if the information provided on your tax returns is conflicting.
Most tax audits are correspondence audits, meaning the IRS requests information via mail rather than questioning the taxpayer in person. Correspondence audits usually focus on specific items in a tax return, such as itemized deductions or specific forms, and will request documentation proving the item. Documents requested could include receipts, checks and similar information.
In-person field audits typically concern the broader tax return and involve verifying income. Other types of audits include an office audit and a taxpayer compliance measurement program audit. With an office audit, the IRS will ask you bring certain documentation into your local IRS office. The audit is conducted at the office.
A Taxpayer Compliance Measurement Program Audit (TCMP) is the most expensive type of audit. The IRS will want every part of your tax return substantiated by further documentation which can include birth and marriage certificates. This audit’s purpose is to update the data used by IRS computer programs.
If you can prove you filed your initial tax return correctly and completely, you will not be asked anything further. However if you provided incorrect information on your tax return, you will have to pay the recalculated tax amount plus any interest and penalties. You will receive a bill in the mail from the IRS that is typically due within 30 days unless you have set up a payment plan.
If you disagree with the outcome of an audit there are steps you can take requesting an internal review or appealing the audit in U.S. Tax Court. If these steps are necessary, make sure to contact Tax Pros Plus for assistance disputing the audit.
Steps You Can Take
Once you are aware your are being audited you should first verify the type of audit being conducted and the reason you are being audited. The IRS should tell you why your return is selected but if they do not you are allowed to get clarification.
The IRS will only contact you by mail or phone, never by email. They will request specific information in the notice and the supplementary documents you will need to present. You usually have 30 days to respond to an audit notice. Do not put off responding to an IRS audit as interest can accrue during this period building on the amount that could be owed to the IRS.
Do not send in your only record of the document and do not send more than is requested. Make sure the documents you have collected match up with the year that is under audit. If you cannot find proof, immediately request a copy. Auditors will not accept the excuse of records being lost or stolen.
If you cannot find a medical bill, contact your doctor or hospital to ask them to provide a duplicate. If you donated money to a charity but cannot find the receipt, contact the charity to send you a copy.
Documents you may be asked for include:
- Pay stubs
- Previous tax returns
- Home mortgage statements
- Brokerage statements
- Hospital bills
- Retirement account records
Once you have collected the documentation needed, organize your receipts and records, especially when facing an in-person audit. Being organized and prepared will show the auditor you take the audit seriously and are prepared to prove you are a responsible taxpayer.
Contact Tax Pros Plus
As soon as you receive your letter from the IRS contact Tax Pros Plus of North Charleston. We can help you step by step through an IRS audit. Our tax professionals can explain the audit process and help you prepare. We will even speak to the IRS on your behalf.
A tax audit can be a very scary thing but we are here to help. We have helped many people in the Charleston area through tax audits and our professionals know exactly what steps to take to show the IRS your tax return was filed accurately.
No matter how simple an IRS audit might seem, we never advise someone to take on the IRS alone. Meeting with the IRS in an in-person audit can be very intimidating, even if you know you filed your tax return correctly.