For most taxpayers, dealing with an IRS audit is an overwhelming and complex process — especially when you consider how convoluted it is to file your taxes in the first place. Received an audit letter from the IRS? Worry not, concerned taxpayer.
In this post, we’ll be discussing what it means to be audited and what you should expect throughout the proceedings, share some tips on how to prepare for an IRS audit, and go over best practices to help you make your case.
For quick reference, use the links below to navigate to the section that best answers your query — or read end to end for a comprehensive overview of IRS audit preparation.
- What is an IRS Audit?
- How to Prepare for an IRS Audit
- Tax Audit FAQs
- What to Expect After an IRS Audit
- How Community Tax Can Help
What is an IRS Audit?
An IRS audit is a close-up review of an individual taxpayer or business’ tax records. Audits are used to ensure that all entities who are subject to federal taxation are abiding by the tax laws set forth by the U.S. Internal Revenue Service.
The IRS uses audits to verify tax accounts, and ultimately, to make sure that all citizens are fulfilling their legal tax obligations. However, a tax audit doesn’t necessarily indicate that you’ve done something wrong. IRS audits can be initiated at random or triggered for a number of different reasons, including:
- Mathematical errors
- High income
- Deductions for home office, entertainment, etc.
- Claiming business use of your vehicle
- Cash business
- Excessive deductions
- Unreported income
In most cases, your audit letter will include details on which items are being reviewed so that you can better tailor your audit preparation strategy. Keep in mind, if you’re selected for an IRS audit, you will be notified by mail, never via telephone. Check out these common IRS tax scams to effectively safeguard your information and personal finances.
Now that you know the basics of what it means to be audited by the IRS, let’s take a closer look at what you can expect throughout the audit process and explore some best practices for audit preparation.
How to Prepare for an IRS Audit
When it comes to dealing with the IRS, it’s in your best interest to act quickly, understand the procedures as best you can, and above all, take the situation seriously. In this section, we’ll answer some frequently asked audit questions, go over the different types of audits, and take a look at four tips to help you with your audit preparation and planning.
1.Organize your records
One of the most important steps to take during audit preparation is identifying and collecting your tax audit required documents. Depending on the kind of audit you’re subjected to and the information they’re interested in, the paperwork that they request from you may vary.
According to the IRS website, here are some of the documents they may ask for:
- Receipts related to business or deductions
- Bills with payee information and description of services
- Canceled checks included with bill records
- Legal paperwork including divorce settlements, property acquisition, tax preparation or advice, and criminal or defense paperwork
- Loan agreements with details regarding loan amount, names of borrowers, loan term
- Logs with information pertaining to job-hunting, travel, etc.
- Tickets including travel and gambling
- Medical/dental records including medical savings accounts, physician statements, etc.
- Theft/less documents such as insurance reports, appraisal information, and photos of damage
- Employment information including general details of employment as well as W-2 records
- Schedule K-1 is used to report each shareholder’s share of income, losses, deductions and credits for S corporations
For easy reference, organize your tax records and other requested paperwork by year and date — having your information well-categorized will help speed up the process and demonstrate compliance with the IRS.
Community Tax Tip:
Remember, the IRS statute of limitations allows them to audit records for up to three years after the filing deadline or filing date, whichever is later; so it’s imperative that you keep your old tax records readily available even after you’ve filed your original return. Individual taxpayers and businesses should also note that the IRS can collect back taxes for up to 10 years of the filing deadline or filing date.
2.Know your rights
In order to move through the audit process efficiently and effectively, it’s important to understand your rights as a U.S. taxpayer.
According to IRS Publication 1, taxpayers are entitled to the following:
- The Right to be Informed
- The Right to Quality Service
- The Right to Pay No More Than the Correct Amount of Tax
- The Right to Challenge the IRS’ Position and Be Heard
- The Right to Heal an IRS Decision in an Independent Forum
- The Right to Finality
- The Right to Privacy
- The Right to Confidentiality
- The Right to Retain Representation
- The Right to a Fair and Just Tax System
3.Hire a professional
Dealing with an IRS audit can be an incredibly confusing, complex, and time-consuming experience, even with proper preparation in place. Thankfully, it is your right as a taxpayer to hire professional representation to guide you through the audit process, accompany you to audit hearings, and act on your behalf. It is important to note that, although you have the right to hire a professional during the audit process, you as the taxpayer are ultimately responsible for any fines or penalties incurred.
Hiring a tax professional can speed up the audit process, ensure that you’re responding in accordance with IRS expectations, and help position yourself for optimal audit results. The team at Community Tax can:
- Respond to an IRS audit notice
- Represent you in audit meetings
- Resolve tax issues
- Strategize for minimized tax penalties
- Set up tax payment plans
- And more!
While taxpayers are afforded several rights by U.S. tax code, it’s still important to understand that your fate is at the hands of the IRS, so acting professionally is of the utmost importance. Whether it’s corresponding with an IRS representative, compiling your paperwork, or attending an audit meeting, make sure that you’re polite, professional, and are providing the most accurate information possible.
If you find that you or your representative is unable to attend an audit meeting, be sure to reschedule as soon as possible. And in general, remember to be as clear and communicative as possible anytime you’re dealing with an IRS issue.
Tax Audit FAQs
Now that you know more about how to prepare for an IRS audit, let’s discuss some frequently asked questions to help you get a sense of what to expect during the audit process.
How long do audits take?
The length of the audit process depends on the type of audit being conducted, the complexity of the review, accessibility of required tax documents, scheduling, and whether the taxpayer concedes or denies the IRS’ findings.
If you disagree with the outcome of your audit, you may need to complete additional steps in order to move forward with an appeal; naturally, this will extend the audit process.
Types of audits
- Correspondence Audit: This is one of the most common types of audits the IRS uses, and they’re typically quite straightforward. During a correspondence audit, you receive a notice via mail with some requests for additional information or clarification on the tax return in question, which you can answer by mail.
- Office Audit: If your tax situation is more complex, your audit may require an in-person review at a local IRS office. The good news is, with proper audit preparation, an office audit can generally be resolved within the same day of your visit.
- Field Audit: Field audits are typically more serious than correspondence or office audits and require the IRS to take a deeper look at your tax record, employment, business, etc.
- Randomized Audits: In addition to investigating specific cases, the IRS also performs randomized tax audits to ensure taxpayer compliance. If you’re being audited at random, the IRS will notify you via mail and follow up if they identify any errors or reasons to investigate further.
Note: No matter which type of IRS audit you’re confronted with, it helps to have a tax professional on your side. Our team of tax professionals have helped over 80,000 clients with their tax needs, and they’re ready to help you! Sign up for your free tax consultation today.
How long does the IRS give you to prepare for an audit?
The IRS gives taxpayers, and their representative if they so choose to have one, 30 days to respond to an audit notice. Whenever dealing with an IRS audit, or with the agency in general, it’s best to take action as soon as possible.
Does IRS audit preparation differ for businesses?
As a business owner, you may need to take some additional steps in order to get ready for an audit. Here are some extra considerations to make to help you prepare for a business audit:
- Make sure your business and personal expenses don’t mix.
- Keep payroll records up to date and readily available.
- Make copies of business receipts, especially if you intend to claim deductions for a business expense.
- Understand the difference between intentional and unintentional failures — unintentional failures are considered tax evasion and don’t fare well with the IRS.
What to Expect After an IRS Audit
After you’ve gone through the motions of IRS audit proceedings, you’ll likely want to kick back and forget it all ever happened. Not so fast. Pending the results of your audit, you may have to take additional steps before you can restore your good standing with the IRS.
There are three possible outcomes of an IRS audit:
- No change: You have substantiated all of the items being reviewed and the IRS found no issues, so there will be no further changes required.
- Agreed: The IRS recommended changes and you understand and agree with these changes.
- Disagreed: The IRS has suggested changes and you understand but disagree with the changes.
If there have been no changes to your account, you can rest easy knowing that your hard work is done, and you can continue implementing best practices as you file your taxes moving forward.
If you agree with the changes made, you’ll need to demonstrate your compliance by signing the audit paperwork and fulfilling any additional steps that the IRS requires of you (ie. amending your return, paying off your tax balance).
If you disagree
, you have a right to make an appeal, request a conference with an IRS manager, or use mediation offered by the IRS.
How Community Tax Can Help
Whether you need tax preparation support to get your tax return submitted accurately and on time or are seeking help with IRS audit preparation, the tax experts at Community Tax are here for you.
Our team is well-versed in the audit process and can ensure you take the right steps to receive the best outcome possible. From setting up manageable payment plans and strategizing when there are no audit receipts accessible, to negotiating audit penalties and attending audit meetings, you can count on Community Tax to lead the way.
Give us a call or sign up for your free tax consultation to learn more about our tax resolution services.