What Happens If You Get Audited by the IRS?
During an IRS audit, an auditor alerts you about issues that the IRS is questioning on your tax return. Then, you provide documents that support your claims, and the auditor reviews your documents. If they agree with the information on your return, they accept the return as filed. If they disagree with your claims, they change your return. Then, you can accept the changes, or contest the changes through an appeal.
That’s what happens during an audit. The concept is pretty straightforward, but the reality of dealing with an audit can be very stressful. If the idea of a tax audit makes you feel stressed, you are not alone. Many people are fearful of a tax audit from the Internal Revenue Service (IRS). Have you received a notice that the IRS is auditing you? Are you worried that you may receive an audit notice? Are you anxious that you might be in trouble if the IRS audits you? If so, you should contact a tax professional today.
Even if you have done nothing wrong, IRS tax audits can be time-consuming and potentially scary. To help you out, we’ve put together an overview of what happens when you get audited by the IRS. It explains the audit process from start to finish and outlines why you should contact a tax professional to help you with the audit.
Once you have a better understanding of why the IRS audits taxpayers and how tax audits work, you will feel a little better about the possibility of being audited yourself. But you can also let us handle the process for you. To get help with an IRS audit, contact us at the W Tax Group today. In the meantime, here’s an overview of the tax audit process.
Selecting Taxpayers for an Audit
The first part of the IRS audit process is selecting who to audit. The IRS randomly selects some returns to audit. It also uses computer screening and related examinations to identify returns for audit.
Computer screening looks for returns that have aberrations from normal practices. For instance, if your deductions are significantly more than similar businesses in your industry, that’s an aberration from the norm. Or if your income is a lot lower than the other incomes in your zip code, that’s an aberration from expected norms. A related examination is when the IRS finds discrepancies between your return and other information it has received about you. This all happens with computers.
Next, an experienced auditor looks at the computer-selected returns and decides whether to accept them or audit them. If the auditor accepts the return, nothing else happens, and the taxpayer doesn’t even know that their return got a second look. If the auditor doesn’t accept the return, they will forward it to an examination group. At this point, the IRS reaches out to the taxpayer and the rest of the audit gets started.
Notifying Taxpayers About an Audit
The IRS notifies taxpayers by mail if they have been selected for an IRS tax audit. The notice should outline details about the audit, and it will have a deadline for you to respond. Look carefully at the deadline. It’s often 30 days for a mail audit, but it can be 15 according to some tax attorneys. For a field or office audit, you generally get more time.
Keep in mind that the IRS starts all tax audits with a mailed notice. The IRS does not alert taxpayers about audits over the phone. If you get a phone call about an audit, it may be a scam. Don’t ever give out personal information or payment details over the phone unless you’re sure who you’re talking to. A real IRS agent will always be able to give you their badge number and a phone number to call to verify their identity. A scam artist won’t have these details.
Types of IRS Audits
The IRS audit notice will tell you which type of audit you’re facing. The IRS uses the following types of audits:
- Mail audits — The IRS asks you to mail or fax documentation to support details on your tax return such as income, expenses, or itemized deductions.
- IRS office audits — The IRS requires you to bring supporting documentation to an IRS office.
- Field audit — The IRS auditor meets with you in your home or business to conduct the audit.
Field and office audits are generally much more extensive than mail audits. While a mail audit may focus on one or two details, office and field audits often dig into every element on the return. If the IRS asks you to mail information and it’s too much to send, you can request an in-person or office audit.
What Happens If You Ignore the Audit Request?
If you ignore the audit request, the IRS will generally make changes to your tax return and send you a bill for the assessed tax. For instance, say that the IRS mails you an audit request about a tax credit you claimed on your return. If you don’t respond, the IRS will disallow the credit and send you a bill for the adjusted tax liability.
Once this happens, you generally have 90 days to contest the assessment in Tax Court. If you miss the 90-day deadline, you may lose your chance to appeal. This is why it’s critical to pay attention to deadlines and get help with the audit process.
What if You Need More Time to Respond to an Audit
Audits can involve a lot of paperwork, and sometimes, it’s challenging to get all the paperwork together in time. If you’re being audited by mail, the IRS will generally give you a one-time automatic 30-day extension. If you’re dealing with a field or office audit, you should contact the auditor assigned to your case to request an extension. If they don’t comply, you can request to speak with their manager.
Note that if you receive a Notice of Deficiency, you can’t get extra time. In this case, you have 90 days to contact the Tax Court about the audit results. Usually, a taxpayer only receives this notice if they have ignored an initial audit notice and the IRS has assessed a tax against them.
What Documents Do You Need for an IRS Audit?
When the IRS audits you, the agency may request a broad variety of different documents. The exact documents depend on the claim the IRS is checking. In some cases, the IRS may audit a few details from your return, and in other cases, the agency may want to audit everything.
For instance, say that the IRS wants to double-check the revenue you reported for your business. You may need to provide sales reports from your point-of-sale system, accounting records that show your revenue, and copies of your bank statements so the IRS can see your deposits.
The IRS will tell you which records you need to provide. Here are some examples: receipts, bills, canceled checks, legal documents such as divorce settlements or property acquisition paperwork, loan agreements, logs or diaries, tickets, medial/dental records, theft or loss documents, employment documents, or K-1 schedules. This is not an exhaustive list.
Submitting Your Documents to the IRS
You may be able to submit some electronic records, while others will be paper records. To keep everything organized, sort the records by year and type of income/expense and include a summary of the transactions. To illustrate, imagine that you’re sending in receipts to back up refrigerator repair costs for your grocery store.
The IRS is auditing two years of your returns, and you have a stack of invoices and canceled checks from your repair person from each of the two years. When you submit these documents, you should sort the receipts by year, and you should also attach a summary of the expenses. You shouldn’t mix these records with any other expense records. For instance, if you are also sending in invoices from your fruit and vegetable vendors, you should include those separately.
The IRS may also send you a questionnaire. The questionnaires ask questions about specific areas of the return, and they generally apply to business taxpayers. Some of the most common audit questionnaires focus on general questions about Schedule C; questions about car and truck expenses on Schedule C; questions about travel, meal, and entertainment costs on Schedule c; and Schedule c repair and maintenance questions.
How Do You Know If the IRS Received Your Audit Documents?
Generally, you won’t know if the IRS receives your paperwork until the IRS sends you the result of the audit. However, if you want to know whether or not the agency received your paperwork, you should use certified mail. Then, you will get a notice from the United States Postal Service (USPS) that the IRS has received your mail.
What Happens at the End of an Audit?
At the end of the audit, the auditor will decide whether or not to change your tax return. If they don’t make changes, you’re done. This is called a no-change audit. You don’t owe any additional tax. If the auditor makes changes, it usually leads to a tax amount due, but in some cases, it can lead to a tax refund.
If you agree with the changes, you will sign an examination report or possibly another type of document that says you agree. Then, you make arrangements to pay the tax assessment. Obviously, in the rare case that there’s a refund from an audit, the IRS will just cut you a check or apply the tax refund to any unpaid tax bills that you have.
What if you don’t agree with the changes from the audit? If you don’t agree with the changes, you can request a conference with an IRS manager. They will look over the results of your case and see if they agree with you or the auditor. You can also request mediation — this is when a mediator works with you and the IRS auditor to see if you can come to an agreement. If there’s still time on the statute of limitations, you can appeal the audit results.
How Long IRS Tax Audits Take
IRS audits can take varying lengths of time. With some mail audits, you may be able to wrap up the process in a few weeks or a couple of months. With a field or office audit, the process may be fast, or it could drag on for months. The total time for an audit depends on the complexity of your tax situation, how quickly you respond to requests for information, and IRS staffing and backlog issues.
Audit and Statute of Limitations
The IRS typically has three years after the filing deadline to assess a new tax against you. If the auditor is auditing a tax return that is close to this deadline, they may ask you to extend the statute of limitations. Before you sign anything, you may want to contact a tax attorney. They can let you know the pros and cons of extending the statute of limitations during an audit, and they can help you decide if this is in your best interest or not.
Audit Technique Guides
If you really want to know every detail of what happens during an audit, you can check out the agency’s Audit Technique Guides. The IRS has guides that help its employees’ audit businesses in different industries.
Some of the guides focus on whole industries or professions such as attorneys, art galleries, or business consultants. Others focus on certain types of businesses such as cash-intensive businesses. Others take a look at a very specific type of tax like the excise tax for indoor tanning services.
The guides are extremely extensive — for instance, the guide to retail store audits is 177 pages long, and the guide for auditing the research tax credit for the aerospace industry is 43 pages long. Keep in mind that if you’re being audited, it’s by an IRS auditor who understands these guides and the audit process. For best results, you should have an experienced audit defense attorney on your side.
Why Does the IRS Perform Audits?
The IRS performs audits to make sure taxpayers fill out their tax returns correctly. Audits help to improve taxpayer compliance. When taxpayers know that they might be audited, they tend to be more honest on their returns.
The audit process is not as scary as it sounds. It really just means that the IRS believes there is a mistake on your tax return, and they need to look into the matter further. Most of the time, if they find a mistake or believe something doesn’t compute, they will request more information from you. Then, they will either adjust the return or keep it as is depending on the information you provide,
What Happens If the IRS Finds a Mistake?
People make mistakes on their tax returns all the time. In most cases, the IRS will simply tell you that you owe more money in taxes. If that’s the case, you can make payment arrangements to deal with the unpaid tax and put this situation behind you. The only time you need to be worried is when the IRS suspects you of doing something illegal. Then, you may face IRS audit penalties or civil or criminal fines. If this happens, you should definitely retain a tax attorney.
IRS Audit Penalties
There are several IRS tax audit penalties that you may face if the IRS finds significant issues with your tax return. Here are some of the IRS audit penalties:
- Accuracy-related penalty — The auditor can assess this penalty if your tax is understated by 10% or $5,000 (whichever is greater) or 5% if you claim the Qualified Business Income Deduction on your return. The penalty is 20% of the understated tax. The exact calculation varies depending on if you were negligent or made a substantial understatement.
- Erroneous Claim for Refund or Credit Penalty — This penalty is 20% of the credit or tax refund you tried to claim.
- Fraud penalty — If the IRS finds that you have underpaid tax due to fraud, you may incur a fraud penalty of 75% of the underpayment. If you’re charged with a felony for tax fraud, the penalty can be $100,000 ($500,000 for a corporation) plus jail time.
Generally, you only face penalties if something was significantly incorrect in your return. The penalties are for people who purposefully tried to reduce their tax liability. They don’t typically apply if you just made an honest mistake. However, to be on the safe side, you may want to work with an audit attorney.
Make the Call to a Tax Audit Lawyer
Now you know a little more about what happens with IRS audits. If the IRS is auditing you, or you need assistance with another tax matter, reach out to a tax attorney today.
Your tax audit lawyer can protect your rights during a tax audit and assist you in straightening out your tax problems so you can move on with your life. Call The W Tax Group at 877-500-4930 or request a free tax relief analysis today.