What Happens During a Tax Audit?
For most Atlanta taxpayers, there is no prospect more daunting than a tax audit. But what exactly is an audit, and how might one affect you?
Despite the fear surrounding this process, an audit doesn’t necessarily mean you did something wrong. There is no need to panic if you find out that the IRS will be reviewing your finances.
In this article, we’ll be demystifying what to do if you receive an IRS audit letter.
What Does “Audit” Mean?
During an audit, the IRS reviews your finances to make sure that your federal income tax return was completed correctly. Their goal is to make sure your finances were properly reported and you paid the right amount in taxes.
Most audits occur within two years of filing a return, but the IRS can go back as much as six years in cases where fraud is suspected.
Why Was I Selected for an Audit?
Only about 0.6% of tax returns are audited each year, so you should not lose any sleep worrying that yours will be selected. However, if you are chosen, you may wonder why.
The IRS uses several methods to select returns for audit. If you are chosen, it does not necessarily mean you did anything wrong.
- Computerized Selection
A computer algorithm compares tax returns using a statistical formula. A set of “norms” is created for similar returns, and if a return is significantly different from its peers, it may be passed on for further review.
- Significant Changes In Your Return
Your account may be flagged if your tax return is significantly different from the previous year’s return. If your 2019 income was reported as $40,000 and your 2020 income rose to $300,000 without any other changes to your return, you may be selected for an audit.
- A Business Associate Has Been Audited
If your tax return contains transactions with a business partner or investor who is undergoing an audit, your return may also be reviewed.
- You Filed An International Return
International returns are the most common group selected for audit; in 2018, 3.4% of international returns were selected for further review.
- You’re A High Earner
Individuals who earn over $1 million annually are selected for audit about 3.2% of the time.
- You Claimed The Earned Income Tax Credit
Paradoxically, if you earn less that $25,000 in a year and claim the earned income tax credit (EITC), you are more likely to be audited. Roughly 1.4% of returns that fit this criteria are selected annually for audit.
- You Filed A Schedule C
Business income reported on a Schedule C can also make you more likely to be audited. In 2018, 2.2% of individuals who earned over $100,000 and filed a Schedule C were selected for audit.
- Random Selection
Each year, the IRS chooses to audit some returns at random. This ensures that the selection process is working properly, and acts as a control group.
How Will I Be Notified If I’m Selected for an Audit?
The IRS will notify you if you have been chosen for an audit via USPS. The IRS will never call you to inform you of an audit; if you receive such a phone call, it is a scam and you should disregard it.
Your notification letter will contain instructions, as well as a phone number in case you have any questions.
How Will the Audit Take Place?
There are three ways the IRS will conduct an audit. They are:
- By Mail
About 80% of audits are conducted entirely by mail. These are known as “correspondence audits.”
Such audits occur when the IRS needs additional documentation to support your return or has a few simple questions to resolve. Once you have submitted the requested paperwork, your audit is complete.
If you have too much information to submit via mail, you can request an in-person audit instead.
If the IRS needs more information, they may request an in-person meeting at an IRS office near you. You will need to bring any documentation requested by the agency, as well as related records that can back-up your return.
You can also invite your accountant or tax attorney to accompany you to the meeting.
- Field audits
An IRS interview that takes place in your home or place of business is known as a “field audit.” This is the most thorough form, and the one that most people picture when they hear the word “audit.”
During a field audit, an IRS agent will visit you and investigate your tax return and your finances. These audits are most common for businesses, but individuals are sometimes selected.
Field audits are usually used when the IRS suspects fraud, or if they have many questions about a return that documentation alone cannot answer.
Field audits can seem quite scary, but as long as you are prepared, you should have no reason to worry.
If you have an accountant or tax attorney, they can be present during the audit to offer guidance and answer questions.
Have all your documentation for your tax return at hand. Any receipts, paperwork, mileage logs, or other corroborating information can help support your return. However, you should not bring too much documentation.
If your 2019 tax return is being audited, bringing documentation for other years could complicate your audit and open you up to further scrutiny.
Be careful not to justify any errors on your return by saying you’ve “always done it this way.” This could also lead the IRS to broaden its investigation. If you have made a mistake on your return, best to note it and make steps to rectify it – not double-down and open yourself up to further scrutiny.
What If I Need More Time?
If you are selected for a correspondence audit but cannot submit your documentation in the requested time frame, you can file for an extension. This one-time extension of 30 days will give you time to collect your records.
Fax a written request to the number on your IRS letter. You can also mail a letter, if you do not have access to a fax machine. However, be advised that the IRS occasionally has backlogs of mail that go months without being checked. If your letter sits unread past the deadline you received, you could face a penalty.
If you have been selected for an in-person audit, you can contact the auditor named on your IRS notice and attempt to reschedule your meeting.
How Does An Audit End?
Sometimes, the documentation that you provide will be enough to satisfy the IRS and your audit will be completed. This is especially true for correspondence audits.
However, in nearly 90% of audits, the IRS proposes a change to your tax return. This could mean you owe additional taxes, or that the federal government owes you. In 2015, over $1 billion was returned to taxpayers who were subjected to an audit.
If you object to proposed changes to your tax return, you can appeal the auditor’s decision. If you contest the results of the audit, you may need to meet with another IRS agent to review your case, or an appeals conference may be formed.
In cases where an audit is not resolved, the IRS may request to extend the statute of limitations for assessing additional tax. Usually, the IRS has three years from the date a return was filed (or due, whichever was later) to request additional taxes. Extending the statute of limitations gives you more time to compile documentation and appeal your case.
You do not have to agree to this extension, but it will mean that the IRS must make a decision based on the information they already have.
Speak to an Atlanta Tax Attorney
Hopefully, you will never need this guide. The vast majority of taxpayers are never audited, and if your financial information is relatively unchanged from year to year, it is unlikely that you will be selected.
If you do receive a notice of an audit by the IRS, do not panic. In all likelihood, the process will be completed by submitting a few documents.
However, if you are intimidated by the process, or confused about the instructions you receive, a tax attorney can be an excellent guide.
Atlantans don’t need to undergo an audit alone. Call Alyssa Maloof Whatley right now at (404) 551-5838 and get an expert to walk you through the process.