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? A tax audit is an accounting procedure where the IRS examines your individual or business financial records to ensure you filed your tax return accurately. If you prove that your initial return was complete and correct, you won't be asked anything further, but if the IRS finds errors or purposeful mis-reportings, you'll 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.
Ask Why Your Return Was Selected For An Audit
While the IRS is supposed to tell you why your return was selected, it's up to you to ask. Your taxes can be audited for a variety of reasons, including:
- • Specific activity on your return, such as cash wages, 1099 and W-2 forms that don't match your reporting, high deductions relative to your income, reports inconsistent with previous years, etc.
- • Related examinations, where your report involves transactions with someone else being audited
- • Automatic flags, where computer programs find outlying “scores” on returns (ex: above average withholding)
- • Random selection
All IRS Notices or Letters contain a notice number in the upper right-hand corner. These numbers will further inform you about the specific issue(s) with your tax return. Once you know what you are being audited for, you can narrow your focus and start gathering relevant documents.
Determine How You Are Being Audited
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 lawyer.
- • Correspondence Audit: the IRS service center asks you for more information concerning a part of your tax return. The IRS is generally seeking receipts, checks and similar information.
- • 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.
For both field audits and TCMP audits, it's highly recommended that you have a lawyer present while the audit is conducted.
Gather Your Documents
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 can't find relevant documentation, immediately request duplicates, since the auditors won't 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.
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