Feel like the IRS has all eyes on you?
Think of filing your taxes as going through security at an airport. Your tax return is you. The security checkpoint is the IRS. Just like you can be stopped while going through security, your tax return can be stopped by the IRS. With a security checkpoint, you’re either stopped because you were the lucky number of the hour or because something triggered suspicion. The same goes for your tax return and the next step is an IRS audit.
What is an audit?
An audit is simply an examination of the information you reported on the tax return you filed for a specific year. Contrary to popular belief, the IRS is not employed with millions of accountants checking each return that comes through their doors. In fact, much of the processing is computerized now. You can imagine how technology can be manipulated a bit by fraud accounts and identity theft. Audits are necessary to help stop that from occurring as well.
What triggers your return for an audit?
Just like at the airport security check, the IRS can stop a tax return randomly or for suspicious activity. Here is a list of the most common audit triggers we’ve come across:
- Math errors
- Claiming home office expenses as a tax deduction
- Rounding your numbers
- Claiming too many business expenses
- Reporting an excessive amount of Schedule C losses
- Claiming a lot of charitable donations
- Forgetting to include your income statements
What type of audit are you subject to?
Today, we love to put labels on things. Audits are no different. There are four types of audits you could be faced with:
- Field Audit: This one seems intimidating because the IRS agent comes right to your place of business to conduct the review.
- Office Audit: This one requires you to compile additional documents to bring to an IRS Service Center. The review is conducted in their office.
- Correspondence Audit: The IRS is requesting receipts, checks, statements, etc for you to mail in for review.
- Taxpayer Compliance Measurement Program Audit: This one is rare but extensive. It requires you to validate each section of your tax return with documentation.
What should you have prepared for the IRS?
Let’s start off with what you should NOT have in an audit. DO NOT bring or mail:
- Original Documents. Make a copy or two, even if it’s just for your records.
- More than requested. The IRS knows what they need to see and they won’t hesitate to ask. Extra paperwork will just slow down the process.
As I mentioned, the IRS isn’t shy about requesting what they need. You’ll know what you should have on hand for the audit. Get it prepared in an easy-to-access way and you’ll be golden.
Does it mean that you’re in trouble with the IRS?
Absolutely not. Sure, it’s nerve-racking to be selected for an audit but it doesn’t necessarily mean you did anything wrong. The IRS is often misinterpreted as your worst enemy. Take a deep breath. If you filed your tax return honestly, then you have nothing to worry about.
Does it mean that you owe money to the IRS?
That’s another no. If the letter you received states that you owe the IRS, it is not necessarily accurate. If the audit is conducted and it turns out that you did in fact report everything correctly, then the amount on the initial letter is no longer expected of you. So take that amount due with a grain of salt until after the audit.
What if I need more time to respond to the IRS letter received?
Typically, the IRS can grant you a one-time 30-day extension without you having to give much of an explanation as to why. However, if you received a ‘Notice of Deficiency’ by certified mail, the IRS will not grant any additional time for you to submit the supporting documentation requested. There are a few ways to make the request:
- Audits conducted by mail: fax or mail your request to the number or address on the letter received.
- Audits conducted in person: call the auditor that was assigned to your case.
How many years back can the IRS audit you?
The IRS has a three year statute of limitations to audit a return. This means that they can audit a return that you filed up to three years ago. For example, if you file your 2016 return on April 15, 2017 then the IRS can audit that return up until April 15, 2020. Keep in mind that if you file an extension, that extends the three year statute of limitations.
There is a second statute of limitations that doubles the time frame to six years. This comes into play if the IRS discovers that a taxpayer omits more that 25% of their gross income from the reported gross income on their return. So if you file in 2017, the IRS can audit your return until 2023!
How long does it take? How is an audit concluded?
The time it takes to conduct an audit can vary based on multiple factors. Although this is probably not the answer you were looking for, it really depends. That being said, the faster you respond to the notice and gather the necessary documents, the quicker you’ll get to the finish line.
At the end of every audit, the IRS provides you with an assessment review which consists of one of the following:
- No change. This means you’ve provided all required information throughout the audit process and the IRS had no changes to address.
- Agreed. This means the IRS proposed changes for you to make. You understood and agreed to comply. This results in signing the examination report.
- Disagreed. This means the IRS proposed changes for you to make. You understood but disagreed to comply. This results in mediation, filing an appeal, or meeting with an IRS manager.
How can you prevent a future audit?
You cannot 100% avoid being audited by the IRS. Remember, some audits are completely random. That being said, there are several precautions you can take to lower your odds of being audited for out-of-the-ordinary activity. Here’s a list of what to do next year:
- Double check your numbers. Even one extra zero added where it shouldn’t be can be a significant fault. Check those over before filing.
- Use exact amounts. Rounding your expense or income amounts looks fishy. Use real totals when you know them.
- Don’t make silly mistakes. I’m talking about your name, SSN, and DOB. It happens and can look suspicious.
- Be honest. This may not prevent an audit. But if you have the necessary documentation and are reporting correctly, then you’re in the best situation.
To audit or not to audit. That is the question.
IRS audits are scary in the same way that your first day at a new job is scary. You’re afraid of the unknown. Now that you know what an audit is and how it works, you can respond to that letter from the IRS with confidence.
Still not so confident? Find an audit representative that will walk you through the process.
Tags: irs audit