First off, don’t panic if you learn you’re being audited by the Internal Revenue Service! TV and the movies make a federal tax audit seem more common and serious than they often are. An IRS tax audit is something that happens all the time, and it doesn’t mean you or your business are in any kind of hot water.
Here’s everything you need to know about an audit of your tax return.
What is an audit? How often do audits happen?
To put it simply, an IRS tax audit is a review of your business’ (or your) accounts and financial information. The IRS wants to make sure your tax information is entered correctly based on current tax laws and to confirm that the reported amount of tax is correct.
An audit of your tax return isn’t super likely. The IRS as a federal agency has been cut back, despite a growing number of tax filers. In fact, from 2010 to 2017, the total number of audits decreased by 40%. And if you haven’t experienced explosive wealth or are consistently raking in millions, the IRS likely won’t spend much time on your file.
All that said, it’s very important to make sure your tax return is accurate, even if you hire a professional tax advisor to file on your behalf. Every federal income tax return is unique, and tax credits and laws can be confusing and overwhelming, even for the pros.
How does the IRS determine who to audit?
The IRS uses multiple methods for determining who to audit:
- Random selection and computer screening — You could be selected by random selection, or the IRS can do a bit of educated selection, meaning they compare your tax return with similar returns they deem to be normal based on data collected by the IRS’ National Research Program.
- Related exams — The IRS also looks at your involvement with other taxpayers, including business partners and investors. These relations have been selected for audits for one reason or another, possibly stemming from an issue that requires additional investigation.
An experienced auditor reviews the information and determines if any audit flags exist, at which point they’ll either accept your tax return or pass it along to an examining group for additional review.
How will I know if I’ve been selected for an audit?
The IRS will contact you by mail. They will not reach out to you via email or phone.
How far back can the IRS go to review my tax returns? How long does it take?
Typically, the IRS will look at anything from the last three years. However, if your case signals multiple audit flags, they may opt to go back farther. Still, they usually stay within the last six years, which is why you should keep your last seven years of tax returns, income information, and certain documents.
How long an audit takes to complete relies on numerous factors, including the complexity of your issues, the availability of information, and your cooperation. Your audit will take place either via mail or an in-person interview.
What do I do next?
Your best move is to cooperate with the IRS. They’ll reach out to you via mail with an audit letter to inform you of the audit process. With it, they’ll include a list of specific, requested documents, so it’s best that you retrieve those and prepare for submission. You can submit some documents or records electronically, but you’ll want to get in touch with your auditing agent to learn what you can expect.
There are options available if you need additional time to track down certain documents or find availability to complete your audit. However, for your own best interest and peace of mind, it’s best to take care of your audit in a timely manner.
The IRS will conclude its audit, and there are three possible outcomes:
- No change — You’ve complied with the audit, and after review, there are no changes to your tax return.
- Agreed — The IRS proposes changes, and you agree with them.
- Disagreed — The IRS proposes changes, and you disagree with them.
If you owe money, you’ll be expected to pay it according to your examination report. You have payment options, just in case you owe a hefty amount.
If you disagree, you are entitled to request a conference with an IRS manager, or you can file an appeal. Hopefully, you won’t need to explore either option!
What are my rights throughout the auditing process?
In addition to professional and respectful treatment from IRS agents, you can expect to be granted confidentiality and privacy, a reason for your audit, a right to representation, and the right to appeal disagreements. A complete list of your rights as a taxpayer can be found here.
The bottom line
Remember that an audit isn’t the end of the world, or the end of your business.
When it comes to an audit, the key takeaway is that you shouldn’t take an audit lightly, but you should refrain from panicking. Work confidently with your assigned IRS agent, and don’t be afraid to ask questions. As long as you’re cooperating and providing the information they ask for, you’ll be okay. And as long as your tax returns have been prepared correctly, you’ll have nothing to worry about!
Finally, seek help when you need it. The tax relief experts at Heartland Tax Solutions are available and ready to assist you with any tax or audit issue. With decades of tax resolution experience, they’ll be with you throughout the audit process and provide you sound advice and confidence that each step you make is the right one.