An IRS audit is a review/examination of a businesses or individuals account and financial information to verify if income and expenses are being reported correctly and according to tax laws.
It is important to note that in most cases the IRS has up to three years to audit your tax return which is why everyone should keep all of their records, tax forms, and other substantiation for a period of at least three years.
Why would I be picked for an audit?
If you receive a letter from the IRS, that does not always mean you’re getting audited, sometimes they are simply looking for more information or clarification on the income and expenses you have reported on your tax return.
If you do get an audit letter it is important to know which part of your tax return is being audited.
Often the IRS agent will have questions about only a portion of the tax return and not the entire return.
Many times the Internal Revenue Service will audit your return due to fluctuations in your average income and expenses over the past couple of years. Also, the IRS could be auditing you because they do not have enough information about you.
The IRS knows all about it
With most taxpayers, the Internal Revenue Service has access to all of their information. For example, total wages and some deductions are reported to the IRS by third parties. However, individuals and small businesses can file deductions and/or credits that are not reported to the Internal Revenue Service by another third-party and verification is needed hence you have the audit process.
Returns filed by the self-employed and the wealthy tend to have a lot more self-reported (items not reported to the Internal Revenue Service by a third party) items that the Internal Revenue Service may question.
Often taxpayers are audited because of related examinations
Returns may be selected for audit when they involve issues or transactions with other taxpayers, such as business partners or investors, whose returns were selected for audit. It is important to know, for instance, if your partner is being audited because the chances are high that you will be audited as well.
An IRS audit can be conducted by mail or through an in person interview with the IRS agent. This interview can either take place at your home or the IRS office. The IRS agent will tell you what records are needed and schedule a date and a time for you to have all substantiation and records at your meeting.
Although you will be provided with a written request for specific documentation, it is important to note the IRS often subpoenas all bank statements, deposit slips, and check copies from each banking account you are listed on.
If you are self-employed, it would be recommended to produce a profit and loss statement for your business earnings and expenses for the tax year in question. Do note the agent will compare your bank records with that of your financials. Be sure you have all of this information on hand and ready to be presented in the case the agent wants to see these items.
How long does an audit take
The length of each audit varies depending on the type the complexity and the availability of the information being requested, the availability of both parties for scheduling of meetings, and your agreement or disagreement with the auditor’s findings.
It is very important to understand the IRS does not accept some electronic records. The IRS may request those in lieu of or in addition to other types of records. Contact your auditor or your tax representative to determine what can be accepted to ensure a software program is compatible with the IRS.
An audit can be concluded in three different ways:
No change: this is an audit which of you have in which you have substantiated all of the items being reviewed and it results in a no change. The majority of audits do not result in this conclusion.
Agreed: this is an audit where the IRS proposed changes in the taxpayer understands and agrees with the changes. This agreement cannot be changed or amended in future dates.
Disagree: this is an audit where the IRS has proposed changes and the taxpayer understands, but disagrees with the changes. Most audits are in this conclusion status.
It is important to note that if you do disagree on the proposed changes there are other options. This would be a good time to ask for professional help in an “Audit Re-Determination”. The audit professional will be able to adjust the numbers the Revenue Agent assessed and negotiate different terms. If after the tax professional and the agent determine the amounts due are still too high, there are still other options available to you after the audit has ended.
We work closely with local IRS agents when it comes to the audit process. Due to an in-depth knowledge of the audit process we can often obtain results favorable to our clients. Call us today – you do not want to work on your own with the IRS if you are being audited.
Serving Houston & Beaumont professional tax audit defense. IRS Enrolled Agent on staff.
Trained experts in the tax audit field. The Ellem Group 409-347-7997