You received a letter from the IRS notifying you of a tax audit. Now what? First thing, take a deep breath. Being audited can be scary, but it does not need to be. Know what an IRS audit is and is not, understand what the IRS expects from you, and prepare to give clear and concise answers.
Knowing what a tax audit is and is not can alleviate many of your fears. Less than 1% of tax returns are audited, although this percentage does increase as your income and other factors increase. However, for the majority of taxpayers, the chances of the IRS auditing you is very low. Also, most audits do not include a comprehensive audit of your entire tax return and only include tax returns filed in the last three years. The IRS can go back further, but it is rare for it to do so.
The IRS conducts audits to essentially confirm your tax return was completed correctly. The IRS will review your tax forms and financial documents to ensure you have followed applicable tax laws. When an audit is completed, one of the three typically happens: 1) you will owe additional taxes, penalties, and interest; 2) the government will refund you money; or 3) the auditor will determine your tax return was filed correctly initially.
The IRS selects taxpayers for audits several different ways. Some taxpayers are chosen by random, so no one can promise you will never be selected for an audit. Other taxpayers are chosen based on a statistical formula, where the IRS compares tax returns to other similar returns and returns outside the “norms” are chosen for audits. Finally, tax returns are chosen based on related examinations, where the IRS may choose your tax return if they are auditing one of your business partners or investors.
To avoid scammers posing as IRS agents, it is important to know the IRS only notifies taxpayers about audits by mail. The IRS will not call, text, or email you to initiate an audit. If you receive a letter from the IRS notifying you of an audit, confirm the number listed on the letter is one of the contact numbers for the IRS by reviewing the IRS contact numbers on the IRS website here. If it is not one of the listed contact numbers, call the IRS at one of its listed phone numbers or speak with your tax professional to confirm you are being audited. A few extra steps now may stop your loved one or you from being scammed for thousands.
Another important thing to keep in mind is that an audit of your federal tax return conducted by the IRS is not an audit of your state return. However, states like Ohio have an agreement with the IRS to share audit results. This means, if the result of the IRS audit affects your state tax return, you should amend your Ohio tax return and correct it as soon as possible.
Although no one can promise you will not be audited, the chances of you being audited are extremely low for most taxpayers. The IRS reports that it audited less than ½% of all individual income tax returns in 2019. That means out of every 1,000 tax returns filed, less than 5 were chosen for an audit.
Understanding what the IRS expects from you during an audit will depend on the type of audit that is being performed. The IRS performs three different types of audits to gather the information they need:
Correspondence Audit. The majority of audits, almost 3 out of 4, are conducted using correspondence. This means you will not come face to face with an auditor. The initial letter from the IRS for audits conducted using correspondence typically confirms the parts of your tax return being questioned. Common reasons a correspondence audit is conducted includes forgetting to add income such as a W-2, 1099-MISC, or 1099-NEC or forgetting to calculate the Premium Tax Credit using Form 1095-A for health insurance purchased through the marketplace (Affordable Care Act).
IRS Office Audit. The IRS will set an appointment for you to come to the IRS office to meet with the auditor in person. Office audits last three hours on average or less. These types of audits tend to be more comprehensive than audits conducted through correspondence only.
Field Audit. Field audits occur when the auditor visits you. Typically, these only apply to businesses, and the auditor will come to your place of business or where you keep your records. These audits are even more comprehensive as it gives the auditor a chance to view your operations. Although they usually last for less than a day, they can take place over more than one day or visit.
The IRS will expect you to be timely, factual, and provide the requested documents. If you cannot provide the necessary information to back up a tax deduction or credit you have taken, be prepared to have your tax return recalculated without the tax deduction or credit in question and penalties and interest applied for paying a lower tax amount than what the IRS determined was owed.
Most people are going to feel more comfortable knowing they are being represented by a tax professional during their audit. For office and field audits, hiring a tax professional is recommended, as they tend to be more detailed and comprehensive. However, whether you hire a professional to represent you is your decision. You may represent yourself for any of the audits conducted by the IRS.
Whether you hire representation will really depend on your comfort level. During correspondence audits, the IRS questions usually are straightforward, like adding a W-2, 1095-A, or requesting confirmation of a corrected tax return. If the information presented by the IRS is correct, it might be as simple as agreeing and paying the additional taxes owed. However, hiring a tax professional can be worth the expense and peace of mind. They may help find credits or deductions you missed or be able to have your penalties waived, which can help reduce the amount you owe. Also, they can amend your tax return, if necessary; review how the IRS calculated its revised numbers; and determine your IRS payment plan options, if needed.
To read more about what an IRS audit is and is not, check the IRS Audits webpage out here.
Audits can be scary, but they do not have to be. Know what an audit is and is not. Understand what the IRS is requesting from you. Prepare to give concise and clear answers. To review your letter from the IRS and understand what is being requested from you and how it affects your taxes or to be represented by experts that understand the audit process, schedule an appointment today with the accounting and tax preparation professionals at Gudorf Tax Group.