If you receive notice the IRS intends to audit your tax return, you may be a little worried. Fortunately, help is available and we have some tips to help you get started.
In this article, we’re exploring what to do if IRS audits you.
What to Do if IRS Audits You?
IRS audits can be frightening and unexpected – they’re rare, after all, and imply something much worse than what they represent. When the IRS begins an audit or investigation into a person’s tax account, their reasons for doing so can be extremely diverse, from something as minor as a simple inconsistency to potential tax fraud.
The scope of their investigation typically reflects why the IRS started any given audit process, and for most taxpayers, tax audits are conducted almost exclusively via mail and are relatively straightforward.
Here’s what to do if the IRS audits you.
Relax and Stay Calm
While the IRS expects a timely response, it doesn’t expect taxpayers to be perfect and understands that it’s easy to make a simple math error, misunderstand how a deduction works, or misplace certain paperwork.
If you’ve been notified via telephone and haven’t received anything in the mail, be very careful with what information you have divulged or plan to divulge. It could be that your notice was lost but note that the IRS never initiates audits via the phone and warns taxpayers to be especially wary of potential tax scams during the holiday season, while everyone is tight on money and anxious about potential financial troubles.
Alongside the initial notice of an audit will come a list of requirements set by the IRS to verify your information. IRS audits typically have one of two outcomes – a change is suggested, or no change is made.
Whether the IRS suggests a change (such as greater tax liability for the income you forgot to disclose, or a deduction you didn’t qualify for) or makes no change depends on whether the information in your tax returns lines up with the information they’ve received from other sources and the additional information you provide them.
Examples of what the IRS might want to see include your books and records, income and expenses, proof of certain purchases, proof that your company vehicle was largely used for business (especially if you don’t have a private car), and more.
Consider What Triggered the Audit
Most IRS audits are the result of a computer system that sorts and automatically flags suspicious tax accounts based on discrepancies between the information provided by taxpayers, and information provided by credit report companies, employers, and so on. Sometimes, the system may trigger a flag when a person earns much more or much less money than other taxpayers with similar careers living in the same area.
These returns are then brought to a human, who decides which are worth investigating, and which aren’t. Due to limited resources and political factors, the number of annual audits begun by the IRS have dwindled in the past few years. Nevertheless, if you have been audited, it’s most likely due to one of the following reasons:
Excessive or Suspicious Deductions
Certain deductions are more likely to grab the IRS’ attention than others, such as a home office deduction (especially now, given the giant shift to remote work among large portions of the US workforce), business-related deductions on income generated from a hobby, or other itemized deductions that seem unusual or excessive for taxpayers with similar incomes and professions.
If you can justify these deductions with the proper paperwork, then the IRS will usually make no change to your account.
Inconsistencies With Your Math
It’s quite easy to make a mistake when filing your taxes, and math errors are by far the most common kind of mistake that the IRS encounters when going through incoming tax returns. It usually corrects these mistakes automatically and sends taxpayers their respective bills if any corrected mistake ends up changing their tax balance.
The IRS may investigate further if the math seems suspicious, or if you use too many round numbers. It might be easier to work out your taxes if you simply round all your income and expenses up or down, but the IRS doesn’t take kindly to such shortcuts.
The IRS compares individual tax returns to information returns provided by businesses and other entities, and if an employer makes note of paying you a wage you didn’t declare, the IRS will come to investigate.
Proximity to Tax Fraud
Sometimes, the IRS may pay extra special attention to people affiliated with someone who has recently committed tax fraud or was engaged in some sort of criminal activity. If your business partner or one of your investors is being thoroughly audited, you or your business may be looked into as well.
An Unfortunate Lottery System
The IRS may also randomly select taxpayers for audit to gather more information for its automated processes and systems. Think of it as a lottery you don’t want to win. Sometimes, these selections are made on the basis of simple discrepancies, in order to make the system more accurate.
This doesn’t mean the IRS will make any changes to your account but may be something you could see as an unnecessary headache, as it will want you to explain these discrepancies, and produce the relevant records and paperwork.
These are just some of the reasons the IRS may launch an audit, though they tend to be the most common ones.
Prepare Yourself for What’s to Come
The IRS will conduct audits either purely via mail (a correspondence audit), by calling upon you to visit them at a local IRS office (a desk or office audit), or more rarely, and usually in cases where a taxpayer fails to return any mail or contact the IRS, they will launch an in-person audit at your home or place of business (a field audit).
The first thing you should do is prepare the information the IRS request as per their Information Document Request. You can seek professional representation if you’re worried about the process, or unclear about how to approach it.
Audits can be perfectly routine, and in some cases, they even lead to tax credit as the IRS discovers you overpaid. In other cases, you may never have to personally see an IRS agent. Sometimes, however, tax audits can feel very invasive and frightening – which is why it’s important to get in touch with a professional tax attorney. It’s especially important to seek out a professional if you disagree with the IRS’s decision, and seek an appeal.