At a glance:
- IRS audits are rare. The IRS does most of them by mail. A full, timely response is critical.
- Face-to-face IRS audits are the rarest of all. It’s important to review your records in detail and prepare for the audit interview.
- The IRS agent’s determination in an audit is not final. You have the right to appeal.
You can get expert help and even have your tax pro represent you in an IRS audit.
What you need to know about IRS audits
If the IRS audits your tax return, the IRS is taking a close look at your return to see whether you included all your income, and took only the deductions and credits you were allowed by law.
IRS audits usually aren’t random. The IRS selects returns that are the most likely have errors, based on complex criteria. After you file a return, the IRS usually has three years from that point to start and finish an audit. The IRS starts most tax audits within a year after you file the return, and it finishes most audits in less than a year.
The IRS audits returns in three ways:
- By mail (correspondence audit)
- At an IRS office (office or desk audit)
- In person, at your home or business (field audit)
During an audit, the IRS will ask you for information and documents that explain your position on your tax return. It’s important to provide the information just as the IRS requests it. If you have a licensed practitioner handling the audit, help your tax pro with the facts, and your tax pro will work with the IRS.
How to address an IRS audit
1. Understand the scope of the tax audit.
- Mail audits are limited to a few items on the audit letter you received from the IRS.
- Office and field audits require more work. You’ll need to gather the information/documents that the IRS is requesting, and prepare to answer in-depth questions about your finances and activities.
- When it comes to office and field audits, unless you are adept at IRS procedures, it’s highly recommended that you get a licensed tax professional (enrolled agent, CPA, or attorney) to represent you and advocate your tax return positions before the IRS.
2. Prepare your responses to IRS questions.
- For a mail audit, prepare a complete response to the items the IRS is questioning in the letter/document you received.
- For office and field audits, prepare for the meeting with the IRS officer/agent. Gather all information the IRS has requested and prepare to present it to the IRS. Prepare for possible questions from the IRS, such as those concerning unexplained bank deposits or additional income. The IRS agent will also ask about your job, family, and any outside businesses. Basically, you’ll need to be prepared to give an account of your entire year’s activities.
- If you don’t have documents to prove any items on your return, you may have to reconstruct it from third parties or other records. If a third party can attest to an undocumented item, you can use techniques such as an affidavit.
3. Respond to IRS requests for information/documents on time, and advocate your tax return positions.
- If the IRS thinks there is an adjustment to your return, the IRS will start asking more questions. You’ll get an Information Document Request, which you’ll need to fully respond to by the deadline.
- The IRS may disagree with you, stating, for instance, that you took a deduction that wasn’t allowed or that you should have reported more income on your return. If you disagree, present your interpretation of the facts and tax law to the IRS.
- Ultimately, the IRS will close the tax audit, either proposing no changes or proposing adjustments to your return. You’ll get a report of the IRS findings and a letter that allows you 30 days to appeal if you disagree (called the 30-day letter).
4. If you disagree with the results, appeal to the appropriate venue.
- Within 30 days, you can request an appeal with the IRS Office of Appeals. After 30 days, the IRS will send you a letter, called a Statutory Notice of Deficiency. This letter closes the tax audit and allows you to petition the U.S. Tax Court.
- In mail audits, remember that the letter proposing adjustments also serves as a 30-day letter. Taxpayers commonly overlook this letter and lose their ability to appeal the audit findings within the IRS.
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