What is an IRS Audit?
An IRS Audit is an in-depth investigation of your tax profile by the IRS. The IRS typically carries ten years of tax information on your tax profile, and during an audit, the IRS can request documentation to support all filed claims that you have made on past tax returns.
Why Does the IRS Audit?
Initially, the IRS implemented the audit system to help diminish the “Tax Gap”, which is the difference between what taxpayers owe to the IRS and what the IRS actually receives.
Most audits are completely random, but some get issued to specific individuals who have suspicious activity.
But let’s assume that you didn’t embezzle thousands of dollars from your work, and you just received an honest, routine audit. You may feel severely unlucky, but don’t worry; here is what you need to know:
The majority of audits are computer-generated.
Your tax return data, along with the tax return data of every other taxpayer, gets implemented into the IRS National Computer Center, which then generates what is known as a DIF score.
The higher your DIF score, the more prone you are to being audited.
There are hundreds of factors that determine your DIF score, but this process is highly secretive. In fact, there are only a handful of people in the IRS who know how this algorithm works.
One of the few known factors is Total Positive Income, which includes all the income you have received from any investments or services (excluding any deductions). The higher your TPI (total positive income), the higher your DIF score may be.
How the IRS Notifies Taxpayers About Audits
If you haven’t received an audit, know that the IRS ONLY sends audit notices by mail. They never initiate via phone call.
Typically, the IRS will conduct the audit one of two ways:
- In-person interview
If your audit is conducted by mail, the IRS may ask to receive further information regarding tax returns within the last three years, including:
- Itemized deductions
To get more in-depth, here is a complete list of what documents the IRS may seek.
If the IRS requests you complete the audit in person, it can take place in two different settings: your local IRS office (office audit) or at your house, business, or accountant’s office (field audit).
Regardless if your audit is purely via mail or requested by interview, interactions are specified in the examination notice.
Under IRS Publication 1: Your Rights As A Taxpayer, you are protected by a list of rights during an audit. These rights include:
- A Right to Professional and civil treatment by IRS employees
- A Right to your tax information remaining confidential and private
- A Right to know what, how, and why the IRS is using your information
- A Right to representation, by yourself or a sanctioned official
- A Right to appeal audit results, whether in the court or directly at the IRS
How Long Does an Audit Take to Complete?
To be blunt, it just depends. Multiple factors apply, such as the audit type, how complex the issues are, how well your schedule matches the IRS, and whether you agree with the audit results.
Unless you are a non-profit organization, there is no “fast track” to getting around an audit; the only option you have is to be as proactive as possible with every step and make sure your bases are covered.
IRS Audits 2021
The entire country was negatively affected by the pandemic and lockdowns, with small businesses like mom-and-pop restaurants and retail stores hit the hardest.
Why would the IRS target businesses that are doing poorly?
The IRS routinely passed over small businesses because of the time and effort it took to audit them. But now, that is not the case.
The IRS has hired 50 more auditors specifically for the task of auditing small businesses. These auditors have the power to review returns that are up to three years old – or older if necessary.
Thanks to audit procedures approved by Congress in 2015, the IRS can collect any unpaid taxes they find during the audit. Essentially, the IRS plans to collect as much revenue as possible by targeting taxpayers with back taxes or unfiled tax returns.
What to do if You Receive an Audit Notice
The worst thing for a taxpayer with back taxes and unfiled taxes to do is nothing.
Even if you are not a small business owner, the IRS will still penalize you with liens, levies or, wage garnishments if you are not compliant.
Instead of burying your head in the sand when the IRS sends you a letter, seek representation from TaxRise. All taxpayers have the right to retain an authorized representative when dealing with the IRS – why not choose TaxRise?
With over 1,200 successful resolutions last year, TaxRise boasts a whole team of certified professionals with years of experience negotiating with the IRS.
If you are facing an audit, call one of our experts at 833-419-RISE. They can guide you through the process and get you on the right track.
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