What is an IRS Audit?
An IRS audit is a review/examination of an organization’s or individual’s accounts and financial information to ensure information is reported correctly according to the tax laws and to verify the reported amount of tax is correct.
If you have received an IRS letter and its contents talk about disallowing or questioning certain deductions; Do not panic and Don Not ignore the letter.
Doing so, may cause the IRS to waive your future rights, assess a new liability, or change your returns.
In this case, you will probably need a tax professional for IRS audit representation who can provide you with IRS audit defense.
- Why am I being selected for an audit?
- How am I notified?
- How will the IRS conduct my audit?
- What do I need to provide?
- How do I know if the IRS received my response?
- What if I need more time to respond?
- How far back can the IRS go to audit my return?
- How long does an audit take?
- What are my rights?
- How does the IRS conclude an audit?
- What happens when you agree with the audit findings?
- What happens when you disagree with the audit findings?
Selection for an audit does not always suggest there’s a problem. Several different methods are used by the IRS:
- Random selection and computer screening – sometimes returns are selected based solely on a statistical formula. The IRS compares your tax return against “norms” for similar returns. They develop these “norms” from audits of a statistically valid random sample of returns, as part of the National Research Program the IRS conducts.
- Related examinations – your returns may be selected when they involve issues or transactions with other taxpayers, such as business partners or investors, whose returns were selected for audit.
Next, an experienced auditor reviews the return. They may accept it; or if the auditor notes something questionable, they will identify the items noted and forward the return for assignment to an examining group.
How am I notified?
Should your account be selected for audit, the IRS will notify you by mail. They won’t initiate an audit by telephone.
How will the IRS conduct my audit?
The IRS manages audits either by mail or through an in-person interview to review your records. The interview may be at an IRS office (office audit) or at the taxpayer’s home, place of business, or accountant’s office (field audit). Remember, you will be contacted initially by mail. The IRS will provide all contact information and instructions in the letter you will receive.
If the IRS conducts your audit by mail, their letter will request additional information about certain items shown on the tax return such as income, expenses, and itemized deductions.
If you have too many books or records to mail, you can request a face-to-face audit. The IRS will provide contact information and instructions in the letter you receive.
Depending on the issues in your audit, IRS examiners may use one of these Audit Techniques Guides to assist them. These guides will give you an idea of what to expect.
What do I need to provide?
The IRS will provide you with a written request for the specific documents we want to see. Here’s a listing of records the IRS may request.
Electronic records that are produced by tax software are accepted by the IRS. The IRS may request those in lieu of or in addition to other types of records. Contact your auditor to determine what we can accept.
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 if the IRS received my response?
For any delivery service you may use, always request confirmation that the IRS has received it. For example, if you use the US Postal Service, you can request one of their additional services to ensure delivery confirmation.
What if I need more time to respond?
For audits conducted by mail – fax your written request to the number shown on the IRS letter you received.
If you are unable to submit the request by fax, mail your request to the address shown on the IRS letter.
Ordinarily, the IRS grants you a one-time automatic 30-day extension.
They will contact you if we are unable to grant your extension request.
However, if you received a “Notice of Deficiency” by certified mail, they cannot grant additional time for you to submit supporting documentation.
You may continue to work with the IRS to resolve your tax matter, but they cannot extend the time you have to petition the U.S. Tax Court beyond the original 90 days.
For audits conducted by in-person interview – If your audit is being conducted in person, contact the auditor assigned to your audit to request an extension. If necessary, you may contact the auditor’s manager.
How far back can the IRS go to audit?
Generally, the IRS can include returns filed within the last three years in an audit. If they identify a substantial error, they may add additional years. They usually don’t go back more than the last six years.
The IRS tries to audit tax returns as soon as possible after they are filed. Accordingly most audits will be of returns filed within the last two years.
If an audit is not resolved, we may request extending the statute of limitations for assessment tax.
The statute of limitations limits the time allowed to assess additional tax. It is generally three years after a return is due or was filed, whichever is later.
There is also a statute of limitations for making refunds. Extending the statute gives you more time to provide further documentation to support your position; request an appeal if you do not agree with the audit results; or to claim a tax refund or credit. It also gives the IRS time to complete the audit and provides time to process the audit results.
You don’t have to agree to extend the statute of limitations date. However if you don’t agree, the auditor will be forced to make a determination based upon the information provided.
You can find more information about extending a statute of limitations in Publication 1035, Extending the Tax Assessment Period, or from your auditor.
How long does an audit take?
The length varies depending on the type of audit; the complexity of the issues; the availability of information requested; the availability of both parties for scheduling meetings; and your agreement or disagreement with the findings.
Publication 1, Your Rights as a Taxpayer, explains your rights as a taxpayer as well as the examination, appeal, collection, and refund processes which are as follows:
- You have the right to professional and courteous treatment by IRS employees.
- You have the right to privacy and confidentiality about tax matters.
- You have 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.
- You have the right to representation by authorized representative.
- You have the right to appeal disagreements, both within the IRS and before the courts.
How does the IRS conclude an audit?
An audit can be concluded in three ways:
- No change: an audit in which you have substantiated all of the items being reviewed and results in no changes.
- Agreed: an audit where the IRS proposed changes and you understand and agree with the changes.
- Disagreed: an audit where the IRS has proposed changes and you understand but disagree with the changes.
What happens when you agree with the audit findings?
If you agree with the audit findings, you will be asked to sign the examination report or a similar form depending upon the type of audit conducted.
If you owe money, there are several payment options available. Publication 594, The IRS Collection Process, explains the collection process in detail.
What happens when you disagree with the audit findings?
UNDERSTANDING AUDIT REPRESENTATION
Also known as audit defense, audit representation is a type of tax debt resolution service. A legal or tax professional will stand in on behalf of a taxpayer during an IRS tax audit process. The IRS allows enrolled agents, CPAs, and attorneys to represent taxpayers before the IRS in income tax audits.
Your audit representative is trained to develop the strategy necessary to defend your position. He or she assists you in the preparation of all documents required by the taxing authority. In many cases, your audit representative will handle all correspondence and attend all meetings on your behalf.