The Senate recently approved about $80 billion in IRS funding, with $45.6 billion for “enforcement.” The IRS also plans to hire 87,000 employees over the next ten years. This has raised many questions about who may be targeted for future tax audits.
With the new war chest of funds and manpower, it’s easier to think you might get audited anytime soon. If you recently got that dreaded letter from the IRS, you may want to read this.
We’re sure you have a lot of questions.
But first off, what is a tax audit?
An audit is an examination of your business or individual tax return to verify that the financial information provided was correct. It’s a formal investigation to verify the accuracy of your tax report and the taxes you paid.
If the IRS wants to audit you, you’ll get notified via mail. The audit letter will inform you whether the review will take place in person or via mail.
Tax audits typically require the last three years’ tax returns. If the IRS finds a significant error, they can request an extra year, but not more than the last six years. If the IRS asks for too many records, you can request an in-person or face-to-face audit.
How Do You Proceed With A Tax Audit?
Here’s what you need to do when you get audited:
Respond on time: Tax audits can be scary, but it’s not as hard as it seems. If you get one, the most important thing is to respond as soon as possible because you only have 30 days to respond to your audit notice. If you ignore your tax audit outrightly, you may end up paying for it in taxes, interest, or penalties.
Prepare your paperwork: Before the audit, you need to prepare your paperwork and ensure your documents match up with the year under audit, understand what the problem is, and determine if you need representation. If you discover that you have misplaced certain records, request that the duplicates be sent to you immediately.
Ask for more time if you need it: while it’s essential to respond to audits as soon as possible, it’s also vital to do it carefully. If you need more time to prepare for the audit, you can ask the IRS for an extension. Typically, you can get a 30-day extension, but if you need more than that, extensions request beyond 30 days will be granted on a case-by-case basis.
Get help: you have the right to representation when you get an audit request. You may want to get a tax professional to review your documents and help you understand what the problem might be. If your tax issue is complex, be sure to get professional representation from an expert CPA or tax strategist.
At Tax Goddess, as trained and experienced professionals, we will guide you on how to appropriately respond to notices, telephone calls, and other such inquiries in a manner that will greatly enhance your opportunities and leniency with the IRS. We’ll exhaust every possible solution to get answers for you.
The documents you could be asked to bring include
- Previous tax returns
- Brokerage statements
- Retirement record accounts
- Home mortgage statements
Why Would The IRS Want To Audit You?
What if the IRS discovers a mistake in your tax return? What if you’ve taken your tax strategies too far, and the IRS comes calling? There are a couple of reasons why the IRS might want to audit your return. Here are some.
You didn’t include your full income: every year, the IRS gets a copy of your W-2 and 1099 forms and then compares it with their tax return. If the system finds a mismatch or shows that you forgot to report some income, the IRS may choose to send you an audit. The IRS is also likely to audit you if they spot unusual business losses or deductions consecutively.
In addition, the IRS also pays close attention to your digital asset; therefore, even if you didn’t receive tax forms, you have to report your digital assets and pay your taxes.
You claimed tax credits: It’s not against the law to claim tax credits if you are eligible. However, when you go overboard with your tax plans and tax credits, you could get audited. If you claimed deductions, tax breaks, or tax credits and didn’t provide proper proof and documentation for it, you could be subject to an audit.
You didn’t report foreign accounts: if you have assets in a foreign bank account worth more than $50,000, the IRS requires you to report it. Failing to report it would get you an audit request.
There’s a tax error on your tax return: for the most part, consulting a tax expert helps you avoid grave maths errors on your return. If you’ve made a mistake on your return, the IRS may notify you about the mistake and offer options to fix it instead of conducting a full audit.
What are the stages of a tax audit?
The stages of an audit depend on the complexity of your case. An audit process includes these stages:
Audit notification: the IRS notifies you that your tax return has been selected for an audit. This notification includes the specific items and areas of your return that will be examined.
Initial contact: once you’re notified, you’ll be assigned an IRS agent who will schedule an initial meeting with you and request various information related to the audit.
Field audit: if the nature of your tax audit is complex, the audit may conduct may be conducted at your CPA’s office, your place of business, or at the IRS office. This involves a detailed examination of your records.
Issue identification: as the audit progresses, the IRS agent identifies specific issues that require examinations, such as your credits, reductions, or returns.
Discussion and negotiation: once the IRS identifies the issue, the IRS agent will discuss theory findings with you. Here, you’ll have the opportunity to provide an explanation, present additional documentation and negotiate disagreements related to the audit.
Resolution: After negotiating, a resolution will be reached on the audit. This could include agreeing to your tax liability or appealing the decision if you disagree with the resolution.
Types of Tax Audits
The IRS could request one of the following types of audits.
- Correspondence audit: in a correspondence audit, you’ll get a letter requesting proof of documentation or a statement to verify the information on your tax return. This is the most common type of audit and is usually related to cases such as an unusually high charitable contribution.
- Office audit: an in-person tax audit may be rare, but it can happen. If your tax issue is complex and beyond the scope of a correspondent, you or your representative might have to attend an in-person meeting with an auditor at the IRS office.
- Field audit: this is a physical meeting between you or your representative and an auditor, usually at your CPA’s office, at your home, or place of business.
- Taxpayer compliance measurement program audits: With this type of audit, the IRS agents examine every item and event in your life that is related to your taxable income. This type of audit is usually rare and may mean you need to provide personal documents such as your birth certificate and marriage license to check that all the paperwork you provided is true.
The possibility of getting audited may frighten you, but on the brighter side, it’s also a good motivation to keep good records and pay closer attention to your tax return. Nonetheless, you don’t need to be afraid. The most important thing is to focus on dealing with the audit in the best ways.
Understanding the reason for the audit helps you decide if you need representation or not. If your tax situation is too complicated to understand, it’s best to seek the service of a tax expert like Tax Goddess. This will ensure your case is solved quickly with the IRS without losing legitimate tax benefits.