Worried you’ll be audited by the IRS? The good news is you have a less than 1 percent chance of that happening. But what if the IRS flags your return for further review?
In this guide, you’ll discover the reasons why you may be selected for an audit, how the IRS conducts audits, how long an audit takes, and what information you’ll need to provide during the process. There’s also guidance on moving forward after the audit if you need help resolving tax-related matters.
Who Can Be Audited by the IRS?
The IRS audits both individuals and organizations to confirm they comply with tax laws when filing returns. While some audits are random, others are triggered by questionable write-off and deductions or other activity flagged by the IRS.
Reasons Why You May Be Selected for an Audit
Wondering what makes the IRS select taxpayers and organizations for an audit? Here are four common reasons:
1. Random Selection
Some returns are selected at random through a computer screening conducted by the IRS. However, most audits result from related examinations, audit triggers, or conflicting information.
2. Related Examinations
Does your tax return include transactions from other parties, like investors or business partners, who’ve been audited? Your returns could also be audited to ensure accuracy and compliance with tax laws.
3. Audit Triggers
These issues could raise eyebrows over at IRS headquarters:
- Understated income
- Round numbers throughout your tax forms
- Math errors, including omitted or transposed numbers
- Excessive charitable donations relative to your earnings
- Unreasonable or excessive business expenses
- Home office deductions
- Sizable Schedule C losses (if you’re self-employed or an independent contractor)
4. Return Mismatches
The wage and income information on your return should match what the IRS has on record. Otherwise, the system will trigger a mismatch, which could result in an audit.
How the IRS Conducts Audits
How will you know if your tax account is flagged for an audit? The IRS will send an official notice by mail to your home or business address (if applicable) that details and instructions about what information you’ll need to submit to comply with their request. It’s referred to as a Notice of Audit and Examination and also includes deadlines to submit documents along with contact information in case you have additional questions or concerns.
There are two main ways in which the auditor will conduct the process, by mail or in a face-to-face interview.
By Mail
Your audit could be handled by mail if you can forward the requested documentation to the IRS. But if you have excessive documentation, an in-person interview could be more feasible. You can contact the IRS to request this option.
In-Person Interview
The IRS conducts in-person interviews at the place of business; these could be home or office audits and are referred to as field audits or at an IRS office.
How Long an Audit Takes
It depends on the scope of the type of audit and if the IRS has the information they need to move forward. The amount of time it takes to complete an audit is also determined by the schedule of both parties and if they are on one accord regarding the audit findings. Division can result in processing delays.
What Do You Need to Provide for an Audit
You will receive a letter that outlines the documents needed by the IRS to conduct the audit. By law, you must maintain tax returns and supporting documentation for at least three years from the date of filing.
You could do this yourself or use a certified public accountant (CPA), enrolled agent (EA), or tax attorney to represent you through the audit process.
If you’re self-employed or your business is being audited, here is a list of documents the IRS could request for the audit:
- Bills: include the organization or person your company paid and the relevant business purpose
- Canceled checks: combine with the bills they were used to pay
- Employment documents: include dress code or uniform policies, W-2 reimbursement guidelines, and continued education requirements
- Legal papers: include criminal or civil defense documents, custody agreements, divorce settlements, documents related to tax advice or preparation, and property acquisition documents
- Diaries or logs: include the locations and dates of travel, along with the mileage and business purpose
- Loan agreements: include a copy of the original loan documents and a detailed description of the loan proceeds were used
- Medical and dental records: include benefits and reimbursement policies, attendance care contracts, physician statements, medical savings account statements, and capital improvement records for medical purposes
- Receipts: organized by date and notate the reason for the purchase and relevant business purpose
- Schedule K-1: include what an S corporation files in the annual tax report in terms of share of income, losses, deductions, and credits
- Theft of loss documents: include detailed insurance reports and evidence, like video and photos, an explanation of the loss, and an appraisal before and after the damage occurred
- Tickets: include tickets related to travel and notate the business purpose
If the audit is conducted by mail, be sure to send copies of the originals.
How Far Back Can the IRS Go to Audit Returns?
The IRS can go back three years to audit returns. However, there may be instances where the IRS goes back even further to investigate, so consider storing tax records for up to 8 years in case they are needed.
What Happens After the Audit?
Once the audit is complete, the next steps will depend on the outcome and if you agree or disagree with the findings. You will receive a General 30-Day Letter that explains the audit’s outcome if any changes are needed.
If You Agree with the Findings
Assuming no changes are needed, no further action is required from your end. But if adjustments are necessary, the IRS will request that you sign off on a document (referred to as the Request for Consideration of Additional Findings) that details the changes.
You could also be required to remit payment for unpaid taxes or penalties and will receive a Notice of Deficiency demanding payment within 90 days. If you can’t repay what you owe, there may be payment options available to you. So, it’s vital to respond to the notice as soon as possible or consult with a professional for additional guidance.
If You Disagree with the Findings
Taxpayers who disagree with the findings can submit a written appeal to the IRS. You can also reach out to an IRS appeals officer to request a mediation or petition the IRS for a conference with an IRS manager. Be sure to take swift action as you only have 15 days to file an appeal. There are other options that may be provided from a tax relief expert like an Audit Reconsideration or other formal Audit Appeals.
Getting Help from IRS Experts
Are you facing an IRS tax audit and aren’t sure what to do next? Or maybe you’ve been audited and disagree with the findings? Consult with a tax professional or tax relief firm to discuss your options.
