IRS Audit Overview
Understanding an IRS Tax Audit So You Can Respond Effectively
An IRS tax audit is when the IRS tries to confirm the details of your tax return to determine its accuracy. Everyone has heard that the statistics of getting selected for an audit are against you. It is true that the statistics are low, in fact, it is about 1 in 75 people will get audited. Statistically speaking this means that about 80% of all people do get audited once in their working lifetime. The statistics are different for differing income levels and types of employment.
The IRS Tax Audit Selection Process
When it comes to getting selected for an IRS audit it is not completely random. People who do get selected actually do have a high likelihood of having made an error or made fraudulent claims on their tax return. The main driving force for determining who gets audited starts with an IRS algorithm. The IRS algorithm will give each tax return a score, the higher the score the higher the potential it has for an audit. Pretty much what the algorithm does is find individuals with high expenses and low income. It will find that if you reported a low income and a mortgage payment of about the same, it will most likely give a high score because the likelihood of you being able to pay for regular expenses after the mortgage with your income is highly unlikely. After the algorithm gives scores to the tax returns, these tax returns are then passed off to a human representative for checking and typically about 1/10th of these algorithm suggested audits end up in an real audit after human review.
Tips If You Are Audited
An audit is the process in which the IRS determines if you have properly reported all income and took the correct deductions. It is your responsibility to prove to the IRS that what you filed was indeed correct and you must provide supporting documents for the majority of it. The IRS will make a determination if you did the proper reporting or not and if not they will assess you additional taxes to pay. At times, but rarely, does the IRS find that you overpaid and they will give you a refund, but don’t count on it. A quick fact is that the IRS actually wins 80% of all audits, mainly because the taxpayers cannot show proper supporting documents. So mainly the reason for the IRS assessing additional taxes is because of bad record keeping, not because of tax payers trying to cheat the system.
Types of IRS Audits
There are three different types of tax audits. The types of audits are mainly determined by the amount of revenue you reported. These three types of audits are: correspondence, office and field
- IRS Correspondence Audit: This is the most common type of audit. This type of audit comes by U.S mail and is conducted via mail. Typically the IRS will ask you to mail certain tax documentation to them supporting certain items that you filed on your tax return. Normal transactions that they ask for are stock transactions, sale of real estate documentation, and details on other specific itemized deductions. Often, these types of audits happen because there is a difference in what you sent them when matched with 3rd party documentation they have also received. A good example is that you reported a different amount than what was reported to them on a 1099 form from a company you were paid by.
- IRS Office Audit: The IRS office audit is a meeting set up with the IRS that the IRS determines the time and specific documents that you should bring with you for support. The IRS will send a letter setting a time and date or requests that you call them up to setup an appropriate time. Mainly in these types of audits the auditors will only examine “significant” items on your tax return. During the IRS audit, the auditor may ask difficult questions about unlisted items that were on the original letter, you can tell them that you are not ready or are not prepared to talk about those items and they will drop them and bring them up in a second visit. Most of the time, it is good to consult with a licensed tax professional such as a CPA or Tax Attorney so they can provide you with important advice and keep you from making the situation worse.
- IRS Field Audit or Home Audit: This is when you receive a notice that the IRS wants to come to your home or business for an audit. These are typically the most serious types of audits, the IRS’ top auditors are used in these types of audits. If you receive one of these audits, most likely you have earned well over 100,000 in your business or self employment. If you receive one of these audits it is highly suggested that you have a some type of licensed tax expert on your side to help with the audit to ensure you are well prepared and answer all questions accurately and as honestly as possible.
IRS Tax Audit Representation
When being audited by the IRS it is important to know their rules of the game. IRS Tax auditors are experts are evaluating people and uncovering elements of your situation that may not have been covered in the initial audit notice. Having a licensed tax professional on your side can significantly increase the odds of you getting a better outcome on your audit. Having a W Tax Group licensed tax professional represent you before the IRS could actually end up saving you a significant amount of money. The IRS tax code has many thousands of unique regulations, it’s very unlikely for anyone except an experienced tax professional to know them, understand them and use them to their advantage. This is why it makes logical and financial sense to to put a licensed tax professional on your side.
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