What Does It Mean to Be Audited by the IRS?
Generally, you have less than a 1% chance of being audited by the IRS. But it’s always a possibility, so what does it mean to get audited?
Below, we explain how the IRS selects taxpayers for auditing, what happens during an audit, what you need to provide during an audit, and what to do if you need help moving forward after an audit.
Who Can Be Audited by the IRS?
The purpose of an audit is to check that an individual or organization is filing their tax returns correctly. Some audits are done randomly, but the IRS will also perform an audit if they notice suspicious write-offs, deductions, and so on.
Reasons Why You May Be Selected for an Audit
There are four common reasons why you may be selected for an IRS audit:
- Random Selection: again, some returns are simply random. But most are triggered by something specific in a tax return.
- Related Examinations: You may be audited if your tax return contains references to other parties who have also been audited. Examples include business partners or investors who you’ve had transactions with.
- Audit Triggers: There are specific triggers that will cause the IRS to initiate an audit if they’re found in your return:
- Understated income
- Round numbers throughout your tax forms
- Math errors, including omitted or transposed numbers
- Charitable donations that appear too big for your income
- Unreasonable or excessive business expenses
- Home office deductions
- Sizable Schedule C losses (if you’re self-employed or an independent contractor)
- Return Mismatches: The IRS keeps records of your wages and income. When you submit a return that has different values for these items than what’s in your record, it will trigger a mismatch. This can result in an audit.
How the IRS Conducts Audits
The IRS will notify you if you’ve been selected for an audit. This will take the form of a Notice of Audit and Examination, which will include instructions about what documents you’ll need to submit and the deadlines for doing so.
The audit itself will be done in one of two ways:
If your audit is small enough in scale, it may be done by simply having you mail in the necessary documents for the IRS to examine.
If too much documentation is being requested for you to mail it all in, you can request an in-person interview using the contact information in the notice you received from the IRS. In these cases, the IRS will either have you come to their local office, or they’ll come to your home or place of business.
How Long an Audit Takes
How long an audit takes depends on the scale of the audit and how complete the information is that you provide. Once the initial audit has been completed, additional time may be required if you and the IRS disagree on the findings
What Do You Need to Provide for an Audit
Again, what documents are needed by the IRS will be included in the Notice of Audit and Examination. It’s important to note that you are legally required to maintain tax returns and supporting documents for at least three years after they’ve been filed. You can maintain your return history yourself, or have a qualified professional do it for you. Examples of qualified tax professionals include certified public accountants, enrolled agents, and tax attorneys.
If you’re self-employed or your business is being audited, the IRS may request:
- Bills, including the organization or person your company paid and the relevant business purpose.
- Canceled checks, combined with the bills they were used to pay.
- Employment documents, including dress code or uniform policies, W-2 reimbursement guidelines, and continuing education requirements.
- Legal papers, including criminal or civil defense documents, custody agreements, divorce settlements, documents related to tax advice or preparation, and property acquisition documents.
- Diaries or logs, including the locations and dates of travel, along with the mileage and business purpose.
- Loan agreements, including a copy of the original loan documents and a detailed description of how the loan proceeds were used.
- Medical and dental records, including benefits and reimbursement policies, attendance care contracts, physician statements, medical savings account statements, and capital improvement records for medical purposes.
- Receipts, organized by date and with notations explaining the reason for the purchase and relevant business purpose.
- Schedule K-1, including what an S corporation files in the annual tax report in terms of share of income, losses, deductions, and credits.
- Theft or loss documents, including detailed insurance reports and evidence, like video and photos, an explanation of the loss, and an appraisal before and after the damage occurred.
- Tickets, including tickets related to travel, with notations explaining the business purpose.
- If the audit is conducted by mail, be sure to send copies of the originals.
How Far Back Can the IRS Go to Audit Returns?
In most cases, the IRS can audit returns from up to three years ago. That said, there are certain cases where they need to investigate even further back into your return history, so it’s worth hanging onto all of your tax records.
What Happens After the Audit?
What happens after an audit depends on whether or not you dispute the outcome, and the outcome itself. The IRS will send you a letter explaining the outcome they reached.
If You Agree with the Findings
If you agree with what the IRS finds during their audit, then the process is complete. If they have determined that you have unpaid taxes or penalties, they will send you a Notice of Deficiency. Generally, you will have 90 days to pay what you owe. If you can’t pay, you need to respond to the notice as soon as possible or talk to a tax professional about next steps.
Assuming no changes are needed, no further action is required from your end. But if adjustments are necessary, the IRS will request that you sign off on a document (referred to as the Request for Consideration of Additional Findings) that details the changes.
If You Disagree with the Findings
If you disagree with the IRS’ findings, you will be required to fill out a Request for Consideration of Additional Findings explaining what you disagree with. You can also contact an IRS appeals officer to request mediation or request a meeting with an IRS manager. You only have 15 days to file an appeal, so you need to move fast. If you work with a tax professional, you may have additional options, such as other types of Audit Appeals or filing for an Audit Reconsideration.
Getting Help from IRS Experts
Get in contact with a tax professional or a tax relief firm if you’re facing an audit that you don’t know how to handle. The team of experts at Larson Tax Relief is an excellent choice. We have over 16 years of industry experience, and the service we’ve provided to our more than 18,000 clients in that time has earned us an A+ rating from the Better Business Bureau.
About Larson Tax Relief
Larson Tax Relief is a family-owned and operated tax resolution company that’s been helping individuals and businesses around the US since 2004. With an A+ rating from the Better Business Bureau, Larson is comprised of 65 employees, including 17 federally licensed IRS Enrolled Agents.
One of those agents is Larson co-founder and company president Jack Larson, who is a member of both the National Association of Enrolled Agents and the National Association of Tax Professionals.
To learn more, or to get a free evaluation of your situation call us today at 888-589-0955 or fill out our online form below.