An IRS audit. Just hearing those words can send fear through even the most honest of taxpayers. But it happens to many people, even if they’ve done their best to get their taxes right.
If you’re facing an audit, the best approach is to understand the process, why your return was audited, what your rights and responsibilities are, and how you can appeal the findings. Here are six things to know.
1. An audit is not an accusation of wrongdoing
When your return is audited, you’re not being accused of a crime. The IRS audit is simply conducting an impartial review of your tax return to determine its accuracy. You will be expected to demonstrate that you’ve reported all your income and were eligible to take all the credits, deductions and exemptions shown on your return.
There is also a timeframe involved. The IRS must generally complete an audit within three years of when the tax return was filed unless tax fraud or a substantial underreporting of income is involved.
2. Certain returns run a greater risk of audit
Your return may be more likely to be audited if you are self-employed, receive much of your income in tips or run a cash-intensive business. People who run their own businesses and do their own bookkeeping—such as doctors, lawyers, and accountants—are also more likely to be audited. Taking more than the average amount of itemized deductions in some areas can also do it. They include medical and dental expenses, taxes, charitable contributions, and miscellaneous expenses.
Some other issues that may attract IRS attention include:
- A return that has income that does not match 1099s and W-2s you received
- A return that has alimony deductions
- A return that has rental property loss deductions
- A return that has earned income tax credits
- A return that is missing required schedules
- A return that is missing a required alternative minimum tax form
- A return signed by a preparer associated with problems in the past
3. There are different types of audits
Not all audits are the same. The types include:
- A correspondence audit can occur when you make simple mistakes and must mail related information to the IRS, such as a schedule you failed to submit with your return. There will be no further action if the IRS is satisfied with your paperwork.
- In an office audit, you are usually asked to bring your tax records to an IRS office for examination. If you claimed a high deduction in one area, the IRS might ask to see the related receipts to document those deductions.
- With a field audit, the auditor visits your home or business to review paperwork or other evidence that will verify the accuracy of your tax return. It may be possible for the auditor to visit the office of your representative—such as an attorney, CPA or enrolled agent—instead.
4. It’s important to know your rights
In an audit, you have a right to:
- An explanation of the audit process
- Representation by an attorney, CPA, or enrolled agent
- Claim additional deductions that you didn't originally claim on your tax return
- Request an opinion from the IRS's national office on specific technical issues that arise during the audit
5. Keep these tips in mind
- If you need time to organize your records, request a postponement.
- Be sure to read IRS Publication 1 (Taxpayer’s Bill of Rights) before your audit.
- If you have one, meet with a trusted representative before your first interview with the IRS agent to discuss strategies and expected results.
- Bring to the audit only the documents that are requested in the IRS notice.
- Arrive thoroughly prepared. If your records back up the items claimed on your return, the agent won't waste time conducting a more in-depth audit.
- Be professional and courteous (and expect the same treatment in return).
- Do not volunteer information to the IRS agent. If you have a representative, he or she should respond to the agent's questions.
- Be honest.
- Keep detailed records of any materials that you submit to the agent and of any questions the agent asks.
- Ask to speak to the auditor's supervisor if you think that the agent is treating you unfairly.
- The auditor will send you an examination report. If you don't understand or agree with it, call the auditor with your questions or concerns.
- If you don't agree about the tax liability, meet to see if a compromise can be reached.
6. You can appeal if you disagree with the audit result
If you agree with the auditor's findings, you'll complete some paperwork and pay what's owed. If you disagree, disputed items can be reviewed informally with the auditor's supervisor or through mediation known as Alternative Dispute Resolution (ADR). If that doesn’t resolve the problem, you can file an appeal with the IRS Appeals Office, which is independent of the local office that conducted the audit. Send a protest letter to the IRS within 30 days of receiving the audit report. If you can’t reach an agreement with the appeals officer, you may be able to take your case to the U.S. Tax Court, U.S. Court of Federal Claims, or U.S. District Court in your area.