An IRS (Internal Revenue Service) audit is an examination of the accounts and financial information of an individual or organization. The goal of an audit is to ensure the information reported by the individual or company on their tax returns is correct, complies with tax laws, and accurately reflects the financial position of the organization at a given date. The IRS may request an audit if they spot business transactions or records that come across as red flags. However, the odds of being audited are low. But what happens when you get audited?
Who is Selected for an Audit
There are a few reasons why the IRS will select an individual or business for an audit. One method the IRS uses is random selection generated by a computer. The IRS also uses a method called related examinations to determine who should be audited. This method is based on a statistical formula where your tax return is compared to “norms” from similar returns. You may also be audited if you are involved with other taxpayers who were selected for an audit and their audit report was not satisfactory. This is typically the case for business partners or investors.
Additional Reasons for Audit Selection
Excessive deductions or credits on your tax return, especially when compared to income, may increase your likelihood of being selected for an audit. When deductions are rounded numbers, such as $3,000 or $10,000, for certain activities, this may also pose as a red flag. This may imply that you are estimating the deduction, which tends to lead the IRS to audit you and check if those numbers are correct.
Additional reasons why you may be selected for an audit:
- Business losses claimed for multiple years
- High-income levels
- Substantial or unusual deductions
- Mistakes on tax returns
- Inconsistent records reported to the IRS
What happens when you get audited by the IRS?
If you are selected for an audit, the initial contact will be through mail. The letter you will receive will contain all the information and instructions necessary for the audit to be completed. The audit can either be completed by mail or in-person. The in-person audit is usually used when there are too many books or records to mail in. This type of audit often occurs at an IRS office or the taxpayer’s home, place of business, or accountant’s office.
Depending on the reason for audit, there are different records you might be requested to provide. The requested records should be documents you have already used when preparing your return and should support the income, credits, or deductions that you claimed.
Records requested may be:
- Canceled Checks
- Legal Papers
- Loan Agreements
- Logs or Diaries
- Medical and Dental Records
- Theft or Loss Documents
- Employment Documents
- Schedule K-1
Any records provided to the IRS should be copies of the original. All original copies should be kept in case of future issues. The records sent to the IRS should be organized to help prevent errors or misunderstandings. Organization of the records will also help to speed up the audit process.
Generally, the audit process takes 2-3 months from the time of notice to the conclusion. It may be helpful for a business to have an intermediary communicator such as their accountant or a lawyer who communicates on the taxpayer’s behalf with the tax examiner.
If an audit is concluded with no change, then you have successfully proven all the items were properly reported and there are no changes. When the examiner presents their report, the taxpayer has a window of 30 days to respond and either accept or reject the findings.
An audit is concluded, and findings are agreed upon when the IRS has proposed changes to the taxpayer’s tax returns and the taxpayer has understood and agreed to them. Any money owed must be paid and the taxpayer will need to sign the examination report. If the taxpayer disagrees with the audit report, the taxpayer can then request a conference with an IRS manager or file an appeal.
All accounting professionals agree that should a taxpayer receive audit correspondence, it is advisable to promptly engage a tax professional to guide them through the process of interacting with the IRS during the examination. Navigating conversations with IRS agents can be intricate and anxiety-inducing. A seasoned tax professional possesses expertise in communicating with the IRS and understanding the tax laws used in the preparation of tax returns. This proficiency enables tax professionals to comprehend the elements under scrutiny and provide IRS agents with precise and complete information required to successfully conclude the audit.
Our seasoned audit accountants at The Innovative CPA Group are ready to assist if you receive audit correspondence.