With the beginning of the tax season, millions of Americans are getting their financial houses in order trying to maximize their deductions and capitalize on any new tax breaks recently passed onto the law. The annual ritual comes with a warning that many people take lightly: Do whatever you can to ensure that you don’t get audited.
Typically, the Internal Revenue Service (IRS) audits less than 1% of the tax returns annually, so the probability of drawing federal scrutiny is incredibly low. Though most of the audits consist of IRS employees asking a few questions for clarifications, a fraction of these include going after people (both the tax payers and tax preparers) who intend to defraud the government.
What happens when your business gets audited by the IRS
The IRS reserves the right to audit any taxpayer, even if they don’t see any discrepancies in your business. According to the IRS, taxpayers may fall under the audit scrutiny due to random selection, computer screenings, or just by being tied to other entities such as partnerships or other business collectives.
So here’s how an audit works:
- The agency will notify you via mail
The IRS never initiates contact by phone or email and certainly not by text message or on social media platforms (as constantly stressed by them whenever an IRS Scam makes its way around). The IRS will use postmarked letters via snail mail. Once the correspondence has been received and contact has been established, this is where things typically get more intimate.
- An in-person interview may be arranged
An agent will set up a meeting either at a local IRS office or at your home if necessary. According to the IRS website, “If we conduct your audit by mail, our letter will request additional information about certain items shown on the tax return such as expenses, income and itemized deductions. You can request a face-to-face audit if you have too many books or records to mail.”
- What will you need to bring?
The IRS will tell you what to bring to the audit. The request documents may vary according to your situation. Basically you will need to support the income and losses you claim including the medical/dental records, deductions, credits, insurance reports and more.
- If audit is initiated via mail, they will provide the address for you to mail the paperwork. You will also be asked to fill out a questionnaire. Some of the common forms are Schedule C query and the Travel, Meals & Entertainment query.
- If your meeting is face to face, you will be instructed on what documents to bring. Before getting there, they will want you to organize your paperwork by year to speed up the process.
After getting all of your paperwork, the IRS will make a determination. However, don’t think that this will happen in a timely fashion. Generally, the IRS retains a three-year statute of limitations, and in cases involving the “substantial errors”, they can go back additional years (usually not exceeding six).
What happens when the audit is completed?
After the completion of an audit, you will be notified of the IRS’s determination. The three scenarios include:
When the IRS determines verification of your tax information, you will be asked to sign the examination report and your filing will be processed as normal.
The IRS will recommend adjustments/corrections to be made to your filing and you have to agree with them and make these changes.
You have the right to talk to an IRS manager, file an appeal with the independent Office of Appeals by mailing a protest letter, or request the IRS’s Appeals Mediation Program, when you disagree with the agency’s findings.
Though the federal audit process is pretty straightforward, the process may slightly differ on the state level. For more details, please go through your state’s tax appeals division which is usually found within its Department of Revenue.
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Stephen Wallick started Stephen Wallick & Associates to provide tax and accounting services to Contractors, Real Estate Investors, and Realtors. Steve specializes in IRS Tax Resolution services and works with his clients to resolve cases under scrutiny by the IRS. As a tax professional and enrolled agent, Steve can save you money with IRS loopholes each year. With over 20 years going up against “The Man”, Steve is uniquely qualified to resolve even the toughest IRS cases.