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?
The audit system was implemented by the IRS initially to help diminish the “Tax Gap”, which is the difference between what is owed to the IRS and what the IRS actually receives.
Most audits are completely random, but some are 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 every other taxpayer’s, is 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 extremely 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 called Total Positive Income. This includes all the income you have received from any investments or services (excluding any deductions). Simply put, 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, it is important to know the IRS ONLY sends audit notices by mail and is never initiated 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. This includes:
- Itemized deductions
To get more in-depth, here is a full 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: at 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, any and all interactions will be specified in the examination notice.
During an audit, you are also entitled to a list of rights listed under IRS Publication 1: Your Rights As A Taxpayer. 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. There are multiple factors that apply, such as the audit type, how complex the issues are, how well your schedule matches the IRS’ to schedule meetings, and whether or not you agree with the audit results.
Unless you are a non-profit organization, there really 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.
What to do if You Receive an Audit Notice
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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