What To Do if You Receive an IRS Tax Audit Notice

You’ve just received a notice that your taxes are being audited: what does this mean? A tax audit is an accounting procedure where the IRS examines your individual or business financial records to make sure you filed your tax return accurately. If you can prove that your initial return was complete and correct, you won’t be asked to do anything further, but if the IRS finds errors or purposeful mis-reportings, you’ll have to pay the recalculated return amount as well as any interest penalties. If you’ve received an audit notice, here are the steps you can take to quickly resolve the situation.

Ask Why Your Return Was Selected For An Audit
While the IRS is supposed to tell you why your return was selected, it’s up to you to ask. Your taxes can be audited for a variety of reasons:

• specific activity on your return, such as cash wages, 1099 and W-2 forms that don’t match your reporting, high deductions relative to your income, reports inconsistent with previous years, etc...
• related examinations, where your report involved transactions with someone else who is being audited
• automatic flags, where computer programs find outlying “scores” on returns (ex: above average withholding)
• random selection

Once you know what you are being audited for, you can narrow your focus and start gathering the relevant documents.

Determine How You Are Being Audited
There are different types of tax audits, each with their own requirements. Knowing how you are being audited will help you determine what documents you need, where to send them, and whether you need a tax lawyer.

• Correspondence Audit: the IRS service center asks you to send copies of cancelled checks and receipts to their office so they can verify the deductions on your return remotely.
• Office Audit: the IRS Service Center asks you to bring certain documents in to your local IRS office. The audit is conducted there.
• Field Audit: and IRS agent comes to your place of business to conduct the audit in person.
• Taxpayer Compliance Measurement Program Audit: this is the most extensive type of audit, where every part of your tax return must be substantiated by documents, including birth and marriage certificates. The primary purpose of this audit is to update the data used to write the computer scoring program.

For both field audits and TCMP audits, it’s highly recommended that you have a lawyer present while the audit is conducted.

Gather Your Documents
Once you know what is expected of you, you can start going through your records to find the relevant receipts and documents. Never send in your original documents or your only copy, and never send in more than is requested. If you can’t find relevant documentation, immediately request duplicates, since the auditors won’t accept that the records are missing or lost.

Once you have all your copies and originals, get them organized, especially if you are facing an in-person audit— good organization shows the agent that you are a responsible taxpayer, and may result in the agent limiting the scope of their investigation.

Get A Tax Lawyer
As soon as you receive notification of an IRS tax audit, contact the tax advisor who prepared your return. He or she can explain the audit process and help you prepare. If you are still nervous about the audit, or have a field auditor coming to your workplace, it’s a good idea to hire a professional tax lawyer.

Laws on this topic may vary from state to state. This content is not meant to provide you with complete information and it is not intended to be legal or tax advice. It is recommended that you consult with your own attorney, accountant or other advisor regarding your specific situation.