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IRS Tax Audits 101

Posted by Cailey Taylor on Dec 6, 2018 10:00:00 AM

Tax Audits are one of the most terrifying things a taxpayer can endure. Most taxpayers don’t know what being audited by the IRS entails and usually don’t know what to do if they are audited. IRS audits can be confusing to most taxpayers as most don’t know what the IRS is looking for when they determine who to audit each year and what they are looking for when they perform the tax audit. Tax audits can be a long and exhaustive process that examines every aspect of your financial history for the tax year in question. The average taxpayer won’t be audited in their lifetime, but that doesn’t mean it won’t happen to you. The best way to help yourself in a tax audit is to know why and what a tax audit means and to get a tax attorney to help represent you. Here is the information you need to know if you are selected for a tax audit by the IRS. Finding tax audit help can be hard but knowing the facts can make it easier.
1.) How are taxpayers chosen for an IRS tax audit?

The primary objective of the IRS in identifying and selecting returns for examination is to try to promote the highest degree of voluntary compliance. One way you could be selected for an audit is by being randomly selected. Some federal tax returns are selected solely based on a statistical formula. The IRS compares your federal tax return against the “norms” for similar returns. These “norms” are created from audits of a statistically valid random sample of returns. Another way you could be selected for an IRS audit is if you have issues or transactions with another taxpayer, such as a business partner or investor, that was selected for an audit.

It’s important to know that the primary IRS statute of limitations for a tax audit is three years from when the federal tax return was filed. It is important to note there are many exceptions that give the IRS six years or longer.

The IRS typically examines 50,000 random federal tax returns each year for random examinations. Of those 50,000 only about 2,000 taxpayers will have to submit a full tax audit. If you have an out-of-the norm tax return, you usually are on the list to get audited. The amount of people the computer chooses for the tax audit is always a lot larger than the list of people who actually get audited.

Now there are some steps you can take to help your chances of being chosen for an IRS Tax audit become smaller. You should first and foremost make sure your taxes are filed correctly. Make sure all the numbers match and add up to your forms. It may seem simple, but double check they your numbers add up correctly. One of the most common mistakes the IRS sees on a federal tax return is incorrect math. Use a calculator or double check yourself. Don’t round up numbers or guess if you’re not sure. If you’re trying to choose whether to file online or a through a paper return, file online. 21% of paper filers have some type of errors on their federal tax return compared to the 1% of online filers. If you take deductions on your federal tax return, make sure you have the proper substation to help back up those deductions. Keep in mind filing your tax return late does not help you avoid being audited by the IRS. The IRS can audit anyone for up to three years after the return is filed, not when it is due.

How will I know if I am selected for an IRS Tax Audit?
If you are selected for an IRS tax audit you will be notified by mail. The initial letter from the IRS will include instructions on how to proceed. You will get either a request for paperwork audit, an in-office audit, or a field audit.

When a taxpayer is first selected for audit, he or she will be notified by mail. This initial contact letter will outline whether you are facing a correspondence, in-office, or field exam as well as what tax period(s) and items are being examined. Additionally, you will receive a deadline date to provide paperwork needed to prove the items being examined. 

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What are the Different type of IRS Tax Audits?

Request for Paperwork Audit
A request for paperwork audit is typically the easiest audit and is usually just because the IRS needs some missing paperwork. This type of audit is conducted mostly by mail and is you submitting paperwork to back up your federal tax return. These tax audits typically involve simple issues ranging, but not limited to unreported income, alimony, dependent claims, education credits, etc. This type of tax audit is heavy deadline oriented and it’s important you stick with the deadlines and get your paperwork in on time. This is why it’s important to keep documentation for all your income and all your tax credits and tax deductions. When conducting this tax audit, the IRS may ask for receipts, bills, canceled checks, legal papers, loan agreements, tickets, medical or dental records, theft or loss documents, and employment documents.


In-Office Audit
An In-office audit is a little more serious and is usually more in depth. If you are selected for this type of tax audit, the IRS may be looking for unreported income or improper deductions. In this tax audit, you will meet with an IRS auditor, also known as a Tax Compliance Officer, who will talk to you about your tax return and they will inspect all of your records. The purpose of an office audit is to make sure you are accurately reporting income and paying the lawful amount of tax. You may need to bring in some paperwork and substation to help support yourself and your federal tax return.

Field Audit
The most serious type of an IRS tax audit is a field audit. In this type of tax audit, you will meet an IRS agent, called a Revenue Officer, at your home, place of business or your tax preparer’s office. This type of tax audit revolves around more complicated issues ranging from small “Schedule C” businesses to the largest multi-national corporations. This tax audit will include a thorough investigation of your home and belongings. A field audit is a comprehensive review of your entire financial record. The agent in this audit will usually request your bank statements, accounting records and other items. If you do not give the agent the documents, they will usually summon them from your bank or accountant. Agents in these audits will look at your lifestyle and compare it to your reported income. If the agent believes you are living beyond your income or debt, they can assume you have unreported income. You will know when your field audit will happen by the letter you receive from the IRS. The letter will indicate the time and date of when the field audit will take place. These tax audits can last anywhere from one day to a week, depending on the size of the business.

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What documents do I need for an IRS Tax Audit?
The types of documents you need for an audit can vary by the type of audit you’re going through and the agent who is doing the audit. The IRS agent will tell you directly what items and paperwork they need. This list can include hard copies of documents or electronic ones. Ask your agent what is acceptable. Typical documents the IRS will ask for in a tax audit are receipts, bills, canceled checks, legal papers like divorce settlements or property acquisitions, loan agreements, tickets, medical or dental records, theft or loss documents, employment documents, or a Schedule K-1. The law requires you to keep all records you used to prepare your tax return for at least three years from the date the tax return was filed. 

How do I know the IRS got my response or document?
With any delivery service you use, you can always request confirmation that the IRS has received it. You can also call or contact the agent you are working with to see if they received it. If you do not hear back from the IRS, you may try calling the IRS agent or the IRS directly to make sure they got your response or documents. If they don’t receive your documentation, you could face penalties or have collection action taken against you.


How far back can the IRS go to audit my return?
Generally, the IRS can include tax returns filed within the last three years in an IRS tax audit. If the IRS finds a substantial error, they may add additional years, but they usually don’t go back more than the last 6 years. The IRS tries to audit tax returns as soon as possible after they are filed, but it could be a year or so after you file that you get audited.


How long does an IRS Tax Audit take?
The length of your IRS tax audit can vary depending on the factors of your audit. The length of your tax audit depends on the type of audit, the complexity of the issues, the availability of information requested, the availability for parties to have meetings and your agreement or disagreement with the findings. Getting the documents needed to the IRS can help move your audit along but doesn’t guarantee it will be done sooner. It’s important to meet all the deadlines given to you by the Revenue Officer or Tax Compliance officer, not meeting these deadlines can make the process longer and slower.


How does the IRS conclude an IRS tax audit?

An IRS tax audit can be concluded one of three ways: 
-No change. This means that you have substantiated all of the items being reviewed in the tax audit and it has resulted in no changes to the tax return you filed and in the taxes you owe!
- Agreed. This means the IRS proposed changes to your tax return and the taxes you owe and you understand and agree with those changes. This can be changes to how much you owe, the deductions you take or other items. 
- Disagreed. This means the IRS has proposed changes to your tax return and you understand the changes, but you disagree with the changes.


If you agree with the tax audit, you will be asked to sign the examination report or a similar form depending upon the type of audit conducted. If you disagree with the tax audit findings, you can either request a conference with an IRS manager, go through mediation or you can file an appeal if there is enough time remaining on the statute of limitations. 

IRS tax audits can be hard and complicated and getting audit help is necessary to make sure you don’t end up owing thousands of dollars in taxes because the IRS disallowed your deductions. It’s very important to get tax audit representation through a tax attorney that has experience dealing with all the different types of tax audits and has audit representation experience. That’s where Polston Tax can help. Our team of Tax Attorneys can help you navigate your audit and make sure that someone is there to negotiate with the IRS. Call us now at 844-841-9857 or visit click below to schedule your free consultation.

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