What Is a Tax Audit?
One day, you get a letter in the mail from the IRS, hoping to discover a tax refund in the envelope. You carefully read the letter stating that your tax return has been selected for examination. In other words, your tax return is being audited. You’re thinking the nightmare of filing taxes hasn’t ended. However, tax audits come in different types and forms. Read on to learn about IRS tax audits and discover how to handle them.
Tax Audit: The Basics
A tax audit is a formal examination conducted by the IRS to verify information or uncover fraud and inaccurate tax returns. The IRS selects tax returns to examine both randomly and intentionally. If the audit is selected randomly, the IRS will simply take a closer look to make sure all information are accurate. The IRS will intentionally audit certain tax returns if there are issues, errors, or possible frauds in reporting the tax return.
The IRS sends out audit notification letters by mail for the following several reasons: (1) you have a balance due, (2) you are due a larger or smaller refund, (3) the IRS has questions about your tax return, (4) the IRS needs to verify your identity, (5) the IRS needs additional information, (6) the IRS changed your tax return, or (7) the IRS needs to notify you of delays in processing your return.
Tax audits can be broken down into four different types:
- Correspondence Audit: This is the least serious type of tax audit. A correspondence audit refers to the IRS request of additional information to verify the accuracy or details of your tax return.
- Office Audit: An office audit refers to the in-person interview with an IRS manager to process your audit. To avoid making statements that can be used against you, it's highly advisable to consult with an attorney or a tax professional before you attend the interview.
- Field Audit: This is the most serious type of audit because the IRS agents will visit you at home or business. They may ask to see things that are related to the tax you've reported.
- Random Audit: As mentioned above, tax returns can be randomly selected for an audit. A random audit is made without any particular reason. The IRS auditor will review the entire tax return to make sure the information was entered correctly.
How To Handle Your Tax Audit
For all types of audits, the IRS begins the audit process by sending a notification letter to the taxpayer. If you've received a notification letter, you should first read the letter carefully. The letter should contain important information, such as the reason why your tax return is being examined, specific steps to follow, and a deadline to reply.
Then, prepare yourself to resolve the issue by researching the law and gathering information. Don't feel rushed to contact the IRS to respond to the letter. Any information you give to the IRS may be used against you. If you need more time to gather information or prepare yourself to respond, you can submit a written request to the IRS by fax or mail to get a one-time 30-day extension. However, if you've received a "Notice of Deficiency" in the mail, the IRS won't grant you an extension.
There are three possible ways of concluding an audit. First, an audit can conclude without making any changes. In this case, the IRS accepts the documents or information you’ve submitted, which results in no change to your tax return. Second, the IRS can propose a change to your tax return, and you may agree to those changes. Third, you may disagree with the proposed change made by the IRS and request a conference with an IRS manager to challenge its assessment.
Taxpayers have the right to know what steps to take to comply with the tax laws. The Taxpayer Bill of Rights requires the IRS to provide taxpayers with clear explanations of the laws. There are several rights, which apply to tax audits as well. The IRS informs its employees and the taxpayers that the taxpayers have the following basic rights:
- A right to professional and courteous treatment by IRS employees
- A right to privacy and confidentiality about tax matters
- A right to know why the IRS is asking for information, how the IRS will use it, and what will happen if the requested information is not provided
- A right to representation, by oneself or an authorized representative
Be Prepared for Your Tax Audit: Call a Tax Attorney
Some tax audits can be simple and some can be extremely complicated. Tax audit representation is necessary only if you're charged with penalties or a possible crime. So before responding to the IRS, you should first analyze the status of your tax return and determine what steps to take to resolve the matter. If you've received a tax audit notification, you're best off contacting an experienced tax lawyer near you.