Tax Audits A What to Expect

The chances of a tax audit by the IRS are slim. Only 1% of returns each year are subjected to a formal review on average, and of those, most are for high net worth individuals, self-employed individuals, and businesses with substantial annual returns

And yet, if you are one of the unlucky few who receives a notification from the IRS at some point late in the year, your first thought might be to panic. What are you going to do? How do you prepare for an audit when you’ve never had one before? Fortunately, there are several things you can keep in mind to help with your IRS problem, whether you go it alone or contact a firm like The Tax Defense Group.

What to Expect from an Audit by the IRS

The letter for an audit can come several years after you file a return, adding to the stress of the situation. You’ll be required to gather documentation for a tax debt that you thought was settled months or even years earlier. However, most of the time, these letters come several months before you’re required to have that information together and visit your local office. Many audits don’t even involve in-person meetings if you can provide the required documentation quickly.

There are three types of audits. These include:

Correspondence Audit – This is performed by mail and makes up about 80% of the audits filed against individuals each year.

Office Exam Audit – This type of audit requires you to gather requisite documentation and visit a local office. These audits can last half a day and are usually narrow in scope, focusing only on specific items the IRS is concerned about (for lack of time to go deeper).

Field Exam Audit – A field exam audit is more in-depth and involves an agent visiting your place of business and diving much deeper into all aspects of your return.

The type of audit being done and the information requested are important factors here. While absolute honesty and transparency are important, there’s no need to volunteer more information than is requested. There will almost always be a specified scope to an audit, even if it’s a field audit. Only offer as much as is needed. If you are unsure what the requests being made mean or entail, a tax professional can be of assistance narrowing the scope of the IRS’s request for you.

Adherence to the IRS’s requests is important, but you shouldn’t necessarily take everything they say at face value. Just because the IRS has determined that your interpretation of a specific rule is wrong, doesn’t mean it is. There are many instances in which you can argue you case or provide enough supporting documentation to support a deduction.

What Happens After an Audit?

If it is a simple, narrow scoped audit focused on a missing income source or an improperly taken deduction, the process will be quick, especially if you agree with the assessment. You’ll be issued a bill for the amount you owe plus late fees and penalties, and must either pay it within the time given or create an installment agreement to pay off the balance.

If you can’t show the records requested, you won’t go to jail. It may be the worst case scenario we all envision, but only in the worst cases of negligence does anyone go to the jail for tax evasion. Most people are just left with an adjusted tax return that costs them a bit of money. Throughout the process, be as cooperative as possible as there are other penalties that can be applied for those who made egregious errors or substantially under reported income.

What to Do When Audited

Whether you are organized or not, the audit process can be immensely stressful, filled with detailed requests that you may not know how to address. If this is the case, don’t hesitate to contact an expert in the field. The Tax Defense Group works with individuals and businesses to acquire tax debt resolution and explore back tax solutions for the balance you may owe to the IRS.