You receive a certified letter from the IRS and instantly go into panic mode. After a quick glance, you realize that your return has been selected for an audit. What does this mean for you financially? And how should you move forward?
For starters, you want to understand what triggers IRS audits, which will be covered in this guide. It’s also important to know what to look for in an IRS audit letter, how to respond and where to turn for professional help if needed.
What Triggers IRS Audits
You can be chosen for an IRS audit through random selection done via a computer screening or related examinations. Here’s a breakdown of each:
- Random selection: the IRS uses a statistical formula to determine if your tax return varies from the “norms” of other similar returns included in the sample
- Related examinations: tax returns that contain transactions or issues related to other individuals, investors or business partners who’ve already been selected for an audit could also prompt the IRS to pull your filings for further review
Before a tax return moves to the next step in the audit process, it is analyzed by an auditor to determine if further review is needed. The auditor may also accept the return, and the audit process would end at that point.
How IRS Notifies Taxpayers About Audits
If you’re selected for an audit, the Internal Revenue Service will send you a notice via postal mail. Be mindful that the IRS never communicates its intent to conduct an audit by phone. So, any calls made by a perpetrator claiming to be an IRS auditor or official should be ignored.
IRS Audit Letters
What an IRS Audit Letter Looks like
An IRS Audit Letter typically arrives by certified mail. It includes a statement revealing that your income tax return has been identified for examination, why it’s being audited, the documents you need to provide and this information:
- Your name and address
- The form number
- The applicable tax year
- Your taxpayer identification number or Social Security number
- The contact phone number, fax number and hours of operation for the IRS
If the letter requests sensitive information, like your contact information or taxpayer identification number, it’s a fake.
What To Do If You Receive An IRS Audit Letter
Write A Response Letter To IRS
Respond with the requested documentation by the date listed on the IRS Audit Letter. This may include any of the following:
- Bills
- Canceled checks
- Dental or medical records
- Diaries or logs
- Employment documents
- Legal papers
- Loan agreements
- Receipts
- Schedule K-1
- Theft or loss of documents
- Tickets
You’ll also want to notate your name, contact information, employee ID, business ID (if applicable), tax ID number and the name of your assigned IRS agent in the statement.
If you need more time to respond, fax or mail a written request for an extension using the contact information on the letter. Most taxpayers get a 30-day extension unless the IRS has already sent a “Notice of Deficiency” via certified mail.
Contact A Tax Professional For Help
It’s a good idea to hire a tax professional if you’re selected for an IRS audit. They can assist you with creating an effective written response that addresses the IRS’ concerns and possibly minimizes the time the IRS needs to complete the examination.
Frequently Asked Questions
You’ll generally have 30 days to respond to an IRS audit letter unless you submit a written request for an extension.
The IRS won’t go back past three years for audits in most cases. However, it could choose to examine returns before this period, but not beyond six years, if significant errors or discrepancies exist.
The IRS selects taxpayers for audits based on random selection and computer screening or related examinations. Other common audit triggers include typographical errors, high reported income, omitted or understated income, missing 1099 forms, high-value charitable deductions, excessive business deductions, several itemized deductions, schedule C losses, gambling losses, self-employment, or off-shore earnings.
