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September 25, 2019 | Posted in:

What to Do if You Receive an IRS Tax Audit Notice

You just received a notice that your taxes are being audited: what does this mean?

An IRS audit is a review/examination of an organization’s or individual’s accounts and financial information to ensure information is reported correctly according to the tax laws and to verify the reported amount of tax is correct. If you prove that your initial return was complete and correct, you would not be asked anything further. However, if the IRS finds errors or purposeful misreporting, you will have to pay the recalculated return amount AND any interest penalties.

If you receive an audit notice, here are the steps you can take to quickly resolve the situation.

Why Am I Being Audited?

While the IRS is supposed to tell you why your return was selected, it is 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 do not match your reporting, high deductions relative to your income, reports inconsistent with previous years, random selection, or automatic flags, where computer programs find outlying “scores” on returns.

All IRS notices or letters contain a notice number in the upper right-hand corner. These numbers will further inform you about the specific issues with your tax return. Once you know what you are being audited for, you can narrow your focus and start gathering relevant documents.

You will probably have at least a couple of weeks to prepare. If the appointment is set for an inconvenient time or you find that you will need extra time to pull your records together, call the IRS as soon as possible to request that the audit be rescheduled.

Types of Audits

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 advisor.

  • Correspondence audit: the IRS service center asks you for more information concerning a part of your tax return. The IRS is generally requesting information and the production of certain documentation.
  • 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: an 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.

Documentation

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 cannot find relevant documentation, immediately request duplicates, since the auditors would not accept the excuse that 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.

Audit Outcomes

After you have sent in the necessary paperwork or met with an IRS agent, you can expect one of four outcomes:

  1. No changes needed: your documentation has been reviewed and deemed acceptable.
  2. Make necessary changes: if the IRS suggests modifications to your tax return, work with your tax advisor to update it with the agreed upon changes. If you do owe back taxes, be prepared to pay interest and penalties.
  3. Wait for a refund: believe it or not, an audit can end in your favor.
  4. Challenge findings: if you disagree with an IRS’s findings and you have not been able to come to an acceptable resolution with them, you have the right to request a meeting with an IRS manager, pursue mediation or even file an appeal.

A tax audit may seem like the end of the world, but overall, an audit is much less frightening than you would think.

With an experienced tax advisor in your corner to mediate on your behalf and navigate you through the entire process, you can save yourself a heap of stress. Contact us for more information or to setup a consultation.

 

Author: Valentina Efremova 

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