A tax audit is essentially an accounting procedure that examines your financial records to ensure you filed your tax return accurately. If the IRS finds errors or purposeful mis-reportings, you’ll have to pay the recalculated return amount and any interest. The IRS can choose to audit your tax return for a number of reasons, including:
- Unusual activity on your return (W-2 forms that don’t match your reporting, high deductions, etc.).
- Automatic flags, where the computer programing finds outlying “scores” on a return
- Random selection
There are 4 basic types of tax audits: correspondence audit, office audit, field audit and a taxpayer compliance measurement program audit.
A Correspondence Audit is when the IRS service center asks you for more information concerning a part of your tax return. This usually happens if you a made a simple error on your return.
An Office Audit is when the IRS Service Center asks you to bring certain documents to your local IRS office and the audit is conducted there. This could happen if you had an unusually high tax deduction.
A Field Audit is when an IRS agent comes to your place of business to conduct the audit in person.
A Taxpayer Compliance Measurement Program Audit is the most extensive type of audit, where every part of your tax return must be substantiated by documents.
If you do not have all the information requested, contact your auditor immediately to discuss what information you do have. The quicker the audit begins, the quicker it can be resolved.
Follow these 6 tips if you receive an audit:
- Seek professional guidance. Consult a tax professional to assist you with understanding the audit process, tax law and your rights
- Don’t file a tax return or request to amend during an audit. If you do, the audit could expand to include the new information.
- Gather your documents as soon as possible and never send in your original documents or your only copy.
- Be kind to the auditor. Much of the auditing process is at the discretion of your auditor. The more compliant and willing you are to go through the process with them, the easier it will be.
- Be brief. Auditors are trained to listen to everything you say and saying too much can lead to the auditor looking at other tax years that weren’t covered with the initial audit. Talking too much is a very common mistake and costs people a lot during audits. Similarly, stick to the required documents and keep it simple; do not offer additional tax returns that were not asked for.
- Do not lie or make misleading statements. The IRS may ask questions they already know the answers to in order to see how much they can trust you. It is best to be completely honest.
Once the audit is completed, you will receive the findings outlined in detail. You have 30 days to do any of the following if you do not agree with the audit results:
- Mail in additional documents to be considered
- Discuss your case with a manager
- Request an appeal
If you receive a notice of an audit, it is best to approach the situation in a timely manner and to seek professional guidance from an experienced tax professional.