Receiving an IRS audit letter is rare – less than a percent of taxpayers get audited at just 0.22 percent in 2019. However, just because the chance of an IRS audit is closer to a lightning strike than a fender bender does not mean it is anywhere near as big of a deal. Most audits are simple mail-to-mail correspondence audits, wherein the IRS asks for a few clarifying documents, deliberates your information, and eventually sends you a bill (or, if you’re lucky, a tax refund).
They can happen for nearly any reason – maybe the IRS’ algorithm picked up an irregularity in your tax account, such as having too many whole numbers in your tax return, and they wanted to ensure that you accurately reported all your income. Or maybe your income is unusually high or low this year due to a good or bad season, and the IRS needs some records to clarify the spike. However, some of the IRS’s audits may cause concern.
If the IRS insists on meeting in person – either by coming by your place of business (a field audit) or by inviting you to the nearest IRS office (an office audit), then the matter is something the IRS cannot just sort out over a few simple letters. They may need more financial information, a look at your records and accounting, or will want to conduct a personal interview to get a better grasp of the situation.
The IRS rarely performs in-person audit interviews because a taxpayer’s account was somehow connected to a criminal or tax fraud investigation. If the IRS intends to visit you, seek legal representation. A tax professional can help guide you through the auditing process and ensure things go smoothly. Registered CPAs, enrolled agents, and tax attorneys can represent clients when talking to the IRS.
A look at the IRS’ tax audit technique guides can also help prepare you for what’s to come. Not all audits end in tax debt and despair. Audits are no more than the IRS wanting to perform its due diligence as an agency in charge of collecting tax – and unsurprisingly, you’re much less likely to be audited if your annual income is under $1 million. But if you did receive a letter from the IRS notifying you of a potential audit, here is what you will want to know to prepare.
Why Did I Receive an IRS Audit Letter?
Discrepancies and numerical red flags are the most common reason taxpayer accounts are flagged down for audits. It is too much to go through each taxpayer account individually – the agency does not have enough manpower. It does not have enough human eyes to comb through every incoming tax return. Instead, computers do the job of scanning through returns and throwing up red flags.
Actual human auditors then look at each red flag to decide which is inconsequential or checks out with existing information and which may require additional information and verification. This is where the notice of an audit comes into play. At this point, the notice should provide you with all the information you need for the next step. It will tell you what information to prepare and where to send it.
Do not respond to instructions from the IRS that are not sent through official channels, such as the postal service or the IRS.gov website. The IRS will not call you and begin demanding personal information or money over the phone, no matter how convincing it might sound or how well they spoofed their caller ID.
Legitimate Message or Scam Attempt?
The vast majority of audits take place almost entirely via mail. The IRS will never send you a threatening text message or call you and demand you give them the details of your bank account over the phone to back up your tax return. Do not respond to emails claiming to be from the IRS, either. The IRS will never send you a critical message over email without sending you a physical notice via the mail.
Any attempt to coerce you to pay over email is typically a phishing scam. If you are contacted over the phone regarding tax debt, whether in conjunction with your audit or otherwise, it may be one of the few private debt collection firms the IRS employs – however, these firms can never demand payment. They can only direct you to make a payment via official channels, such as the Electronic Federal Tax Payment System (EFTPS). Report any and all scams you might encounter to the IRS.
When Does the IRS Perform Audits?
The IRS begins filtering through tax returns the moment they arrive and has three years from the date a tax return is sent in to launch and complete an audit for it. Tax audits can take anywhere from a few months to a year for full resolution. The IRS needs time to sort through tax returns and determine which ones require an audit. As mentioned, most audits are performed because of a noted discrepancy or red flag, from a simple math mistake to something more significant.
What If the IRS Wants More Information?
As the auditing process begins, the IRS may ask for more information. In general, the IRS will want to see any of the following:
- Legal documents
- Loan or lease agreements
- Ticket stubs
- Theft reports/loss reports
- And more
Only send the IRS photocopies. Never mail original documents. Never send documents via email. You may send certain documents digitally via specialized tax software. Keeping your records intact for at least the last three years is good practice. The IRS may audit as far back as three years without particular circumstances. Once the IRS decides on your tax account (by sending you a bill for underreporting, for example), you have time to appeal that decision through the Office of Appeals. If you do so, a tax professional is strongly encouraged to seek legal representation.