You’ve been selected by the IRS but you don’t know what to expect during a tax audit? Don’t worry, we got you covered and tell you what to expect and your rights.
Hardly more than 1 million taxpayers In the United States faced an IRS audit of their tax returns in 2017, what nearly represented 1% of all the returns.
If you receive a tax audit notification from the IRS, keep calm, this is a professional procedure that can be solved with the documents they ask for.
Know what to expect may help you fix quickly your mistakes, handle the number discrepancies, respectfully communicate with the IRS agents and complete the procedure with a slight level of stress.
Why the IRS could contact you?
Taxpayers must understand that an audit isn’t a suspicious of a criminal activity. Tax returns are complicated documents that contain financial information that has to be reviewed to confirm them.
The audit process is similar to an exam and don’t implies that you had committed an intentional mistake. In fact, the IRS contact taxpayers for different reasons.
Taxpayers that face audits are chosen after a process of random selection and computer selection, based in a statistical formula, according to the IRS.
The IRS compares the tax returns with the tax rules. If your tax return don’t follow the rules, you can be selected for a tax audit. You’ll learn here what to expect from a tax audit.
If your return includes transactions with other taxpayers, as business partners or investors, and these were audited, you could be audited as well.
Other reasons why you could be audited
- Conflicts on the information of third parties regarding your income in the 1099 and W-2 forms.
- Office at home deductions.
- Rental losses.
- Use of vehicle for business.
- Hobbies related deductions.
- Transactions or bank accounts in foreign exchange.
There are three types of audits
Depending on the level of severity, there are three types of audits. Most audits are not serious, and more than three quarters of audits are completed quickly through the mail.
- Mail audits: the routine mistakes, mathematical errors or missing paperwork is usually handled through mail.
- Office examination audit: An office examination is scheduled in a local IRS office, where the IRS will make sure you reported all your income and your deductions are legitimate.
- Field audit: A field audit is the most extensive type of audit. An IRS agent will visit your home, business or accountant office to examine the records and documents to confirm the information in your tax return is correct.
Preparing for an audit
If you are being audited, the IRS will communicate by mail, not by phone or email. The notification will include the specific information that will be examined and the documents you’ll have to present.
You have 30 days to answer an audit notification. Don’t delay your answer, because the time you spend ignoring a letter can be added to your tax debt due to interests.
Before an audit, you must prepare all your documentation, try to comprehend what’s the problem and determine if you want representation.
Get all the paperwork the IRS asks. You’ll want to make sure you have copies, nor originals. Organize all your documentation and make sure they match the year being audited.
If you see you have lost some records, call immediately and ask for duplicates.
Some documents they may ask
- Mortgage account statements.
- Previous year’s tax returns.
- Receipts and bills.
- Brokerage statements.
- Retirement accounts records.
- Pay stubs.
You may need to contact a tax professional to check all your documentation and make sure you understand why there could be a discrepancy.
If you filed your taxes at home using an online service or a tax preparation professional, the company may give you some audit defense service.
Know your rights
For the audit appointment, you can go by yourself, or send someone for you. This may be expensive, but a certified public accountant (CPA), a lawyer or an agent enrolled in the IRS or your tax preparer can represent you.
During the audit, which will be in person in an IRS office or your home, you must be polite and receptive. Show the IRS agent only the documents requested.
During the audit
Remember you have the right to a fair treatment. According to the IRS, these are the taxpayer’s rights during an audit:
- A right to professional and courteous treatment by IRS employees.
- A right to privacy and confidentiality about tax matters.
- A 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.
- A right to representation, by oneself or an authorized representative.
- A right to appeal disagreements, both within the IRS and before the courts.
After the Audit
An IRS audit may end with no changes, an agreed-upon change or changes that the taxpayer disagrees with and appeals.
After the interview, the examiner will present an audit report generated by computer, which includes the additional amount of taxes owned, and explanation of how your tax return will change, options to appeal this report and a space to indicate if you agree or disagree with the audit results. Signing the report means you are quitting to your rights to go to Tax Court.
If you’re not sure about the audit report, it’s not mandatory to sign it. You can request to speak with the agent’s supervisor to review in depth your documentation. You can appeal the decision after this, request assistance from the Taxpayer Advocate Service and go to court if necessary.
What if you can pay?
Penalties and tax deficiencies can hike your tax bill to an unaffordable amount, but don’t worry, you can do one of three things.
- Get an extension: Call the phone number listed on the IRS bill and ask for a short-term extension, but only if you are able to pay in full within 120 days. If not, you’ll need a payment plan or an offer in compromise.
- Monthly payment plan: You can go to the IRS website and apply for a monthly payment agreement. Monthly dues can be set up as automatic payments from a debit account.
- Offer in Compromise: An offer in compromise is an agreement to settle the tax debt for less than the amount you owe. You’ll need to meet requirements such as proving financial hardship to be eligible.
Now you know what to expect during a tax audit from the IRS and can claim your rights! If you need further assistance, we’ll be more than pleased to give you hand. Remember, what we know means money!