Why did I get chosen for an IRS audit?
You can ask the IRS why your tax return was selected for audit. Knowing why your return was selected for audit can help you determine the best way to respond to the IRS. Doing so can also help you avoid audits in the future.
The IRS may select your return for examination if the information you reported on your tax return does not match the IRS database, or if the information you reported is inconsistent with prior tax years. Sometimes the IRS will audit your return because your return has transactions with someone else who is being audited. Your return may have also been flagged by the IRS computer program because something on your return is outside of the norm for similar returns, such as an above average withholding. Finally, some audits are the result of random selection.
You can lessen your chances of an audit by avoiding some red flags that can increase the probability of your return being audited. Avoiding mistakes on your tax return can also reduce the chances that the IRS will audit your tax return. If you are a sole proprietor preparing your own tax return, reviewing some helpful tips for preparing your Schedule C tax return can help.
What can I expect during an IRS audit?
The IRS may conduct the audit either by mail, called a correspondence audit, or through an in-person interview. The length of time it takes to complete either type of audit varies. The IRS audit notice should explain how the audit will occur. If you are unclear what type of audit the IRS is conducting, a tax advisor or tax attorney can help you determine the type of audit by reviewing the IRS notice.
A correspondence audit generally occurs within seven months of the date that you filed the tax return. The audit notice will typically list the information and documentation that the IRS is seeking and provide a deadline to submit that information. Most correspondence audits are resolved within six months of the start of the audit.
An in-person audit is generally either an office audit, where you are asked to bring your records to an IRS office, or a field audit, where an auditor visits your home or office. Most in-person audits are resolved within one year from the start of the audit. If multiple years are being audited, or there are voluminous records, however, the audit may last for multiple years.
Which documents are important to gather for an audit?
One of the most important steps in preparing to respond to an IRS audit is gathering the documentation that the IRS has requested and the documentation that is required to substantiate your tax return. Often the IRS requests copies of receipts, bills, canceled checks, legal documents, loan agreements, logs or diaries, medical records, donation receipts, bookkeeping records, mileage logs, school records, or birth certificates.
If you are unable to locate a document that is needed for the audit, you can check with your tax professional that is representing you to see what they recommend. For some types of documents, you may be able to recreate the documentation. Sometimes you may have to request a copy of the document from the person or entity that originally created the document. In other instances, a different type of document may be sufficient for the purposes of an audit. For example, in some cases, an auditor may allow you to substantiate an expense with a credit card statement, instead of the original purchase receipt.
If you retained adequate records prior to receiving the IRS audit notice, the process can go much quicker. It is important to ask your tax professional about the types of records to save and how long you should retain those documents.
What can happen if I ignore a tax audit notice?
The worst thing that you can do if you receive an audit notice from the IRS is to ignore the notice. If you do not respond to the IRS, they may issue a Notice of Deficiency that includes additional income on your tax return and the IRS may disallow deductions and credits. If you ignore the Notice of Deficiency, you may lose your right to dispute the tax in the U.S. Tax Court. If you continue to ignore the IRS, the IRS may begin collection activities, which can include wage garnishments, levies, and liens.
When you receive an IRS notice, you can contact the tax preparer that originally prepared the tax return for advice. You may want to see if they are able and qualified to represent you in the audit. If you are not comfortable having the original tax preparer represent you, then you can seek representation from a CPA, Enrolled Agent or tax attorney. When selecting a representative, it is important to make sure that they have the experience in the specific type of audit that the IRS is conducting.
If you have more questions about an IRS audit notice, or other tax concerns, reach out to a Rocket Lawyer network attorney for affordable legal advice.
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.