Written by Gillian Katsumi
January 20, 2020
Only about one percent of taxpayers are audited each year, but if you're not careful, you may find yourself in that minority. If you receive an audit letter from the IRS, do not panic. Taxpayers should understand that an audit in no way implies suspicion of criminal activity. The analysis is a professional procedure that may be resolved by simply presenting the correct paperwork.
What is an IRS audit, and why does it happen?
Many individuals are unsure of what an audit actually is and what may be involved. An audit is defined as an “official examination and verification of accounts and records, especially of financial accounts.” An IRS audit is the government’s way of verifying the items contained in your tax return. Not all IRS audits are the same. Depending on the level of severity, there are three types of audits:
Correspondence (Mail) Audit – Routine errors from incorrect math or missing paperwork are often handled through correspondence.
Office Examination Audit – An office examination is scheduled at a local IRS branch where they will generally try to find out if you reported of your income and that your deductions are legitimate.
Field Audit – A field audit is the most extensive of the three. An IRS agent will pay a visit to your home, business or accountant’s office to examine records and file in order to confirm that your tax return information is correct.
It is not entirely clear why some tax returns get selected for IRS audits over others. The audit process is known as an examination and does not imply that you have intentionally made an error. The IRS contacts taxpayers for a variety of reasons. Some taxpayers are chosen randomly based on a statistical formula, comparing tax returns against “norms” for similar returns. If your return does not follow these “norms,” you may be chosen for an audit.
I received an audit letter from the IRS. What should I do?
The IRS will send you a letter if they decide to audit you – this is their only form of contact. If you receive an IRS audit letter, do not ignore it. Ignoring the IRS is the worst possible thing you can do. You have 30 days to respond to an audit notice. While you should write back as soon as possible, you or your audit representative can ask for more time to gather the necessary paperwork and forms. Gather the forms the IRS has requested, making sure that you have copies, not originals. You will be notified of what documentation the IRS would like beforehand.
What are my taxpayer rights during the audit process?
During the audit, you should be polite and compliant, but keep in mind that you should only show the IRS agent documents that are specifically requested. At the same time, you as a taxpayer have rights and deserve fair treatment. According to the IRS’s “Taxpayer Bill of Rights,” you have the following rights:
The right to know why the IRS is asking for information, how the IRS will use it and what will happen if the requested information is not provided.
The right to receive prompt, courteous and professional assistance by IRS employees.
The right to pay no more than the correct amount of tax
The right to challenge the IRS’s position and be heard.
The right to appeal an IRS decision, both within the IRS and before courts.
The right to know the maximum amount of time you have to challenge the IRS’s position.
The right to privacy and confidentiality about tax matters.
The right to retain representation, by oneself or an authorized representative.
The right to a fair and just tax system.
Tell them what they want to know (and nothing more)
Only about 2% of audits are random. For all other cases, the IRS will have very specific questions it wants you to answer about your returns and will request specific forms and receipts. You have the right to opt for representation to attend in your place or alongside you. During the audit, you only need to provide the forms the IRS has requested and answer their questions to the best of your ability. It is possible to overshare during your audit, so you are better off simply stating your case and answering all the agent’s questions, and nothing more.
What happens after the audit?
Once the audit is done, the agent will present you with a computer-generated audit report. The report will include the amount of additional tax that is assessed, an explanation of how your return will be changed, options for how you can appeal the report, and a space to indicate whether you consent or disagree. The agent’s assessment may end with no changes, an agreed-upon change, or changes that you disagree with and appeal. If you are unsure whether you agree with the report, you do not have to sign it. You can ask to speak with the agent’s supervisor to review the documents further. If you decide to appeal, having first-rate audit representation from an attorney experienced with tax negotiation can make a world of difference.
Do I need audit representation?
IRS audit agents are very experienced in interrogating taxpayers. They may start out with a modest IRS audit letter, or perhaps a phone call asking you to discuss your deductions. You might then be summoned to the IRS office. In virtually all audit cases, the agent will send you a document requesting bank statements, canceled checks, deposits, receipts, driving logs, utility bills and home or office expenses promptly after your first meeting. Most taxpayers are willing to send the agent all the documents requested. However, it is crucial to understand that the IRS is only entitled to certain information. If you send in all the documents they have asked for, it can hurt you considerably moving forward.
Additionally, if you are unable to find the information that the IRS is looking for, you will probably want to call a professional to advise you on your next move. If you have been called in to meet with an agent, you should almost certainly bring in outside help from a qualified tax attorney or accountant.
Most audit appeals are successful to some extent. However, the chances of your appeal being successful are greatly improved with professional assistance. As audit preparation and defense are complicated procedures, you should choose who you want to represent you wisely.
Why Carolina Tax Resolutions?
Carolina Tax Resolutions is made up of a diverse team of tax professionals, both attorneys and accountants, working together to provide superior, expedited results. Taxpayers often make the mistake of only hiring a CPA to handle their audit issues, but a CPA alone may not be best equipped to handle all aspects of your audit. Likewise, if you only hire a tax attorney to represent you, you may also need an accountant to prepare your unfiled tax returns. At Carolina Tax Resolutions, our tax attorneys work hand-in-hand with our accounting team to ensure the best possible resolution of your issues. We are fully prepared to represent and defend you in your IRS audit. Call us at 919-916-1000 to schedule your free tax consultation today.