The idea of getting audited by the IRS is something that can strike fear into the best of us. But the reality is – unless you’ve deliberately tried to evade your taxes – it’s usually not nearly as bad or scary as it sounds.
Understanding what triggers an IRS audit, what the process involves, and what your options are if you fail the audit can alleviate much of the anxiety that comes from hearing the IRS wants to audit your tax returns.
We at Tax Relief Helpers don’t offer tax audit representation as a service, but as experts in all things taxes, we can explain what you need to know if you’re facing an audit, and most importantly – we can help you deal with the consequences of unexpected tax debt or penalties post-audit, if the IRS finds discrepancies in your tax return.
What is a tax audit?
A tax audit is when the IRS examines your tax return, usually after it’s already been approved and processed, to verify that everything stated in your return was accurate.
The IRS conducts audits to ensure that taxpayers (both individuals and businesses) are reporting their financial information correctly and paying the appropriate amount of tax. This includes checking to see that you have correctly reported all your income, and only taken the deductions and credits that you are allowed by law.
The vast majority of tax audits aren’t random. The IRS usually only selects the returns that have been flagged as showing discrepancies, or those that are most likely to have errors – and that selection process is based on a complex criteria and points system.
There are three ways the IRS conducts tax audits, which will depend on the reasons they are auditing your return:
- By mail (known as a “correspondence audit”)
- In person at an IRS office (an “office or desk audit”)
- In person at your home or place of business (a “field audit”)
The majority of tax audits are conducted by mail or at an IRS office, and usually just require you to provide specific additional documents to support the information you provided on your return. Field audits are the most serious, and therefore the most uncommon. These are usually only conducted in cases where the IRS believes significant noncompliance or tax evasion has occurred.
What is tax audit representation?
Your rights as a taxpayer include the right to have an authorized representative stand in and deal with the IRS on your behalf, including during tax audits.
Often, tax audit representation isn’t needed. Especially in correspondence audits, the IRS may just be requesting something simple, such as copies of receipts for deductions you made, or a copy of your 1099 Forms. In these cases, you’ll likely be able to provide the requested information on your own without a problem.
However, if you can’t find the information the IRS is requesting, or have other doubts or concerns about your tax audit, it’s advisable to instruct an authorized professional. Authorized representatives for tax audits include tax attorneys, CPAs, and enrolled agents.
If you choose to seek tax audit representation, your chosen representative will start by reviewing your case in detail and putting a strategy together to defend your position. They will then help you prepare and present all the requested documentation, handle all communications with the IRS on your behalf, and ensure your rights are protected throughout the audit process.
While Tax Relief Helpers does not provide audit representation, we can assist with post-audit needs should you find yourself facing unexpected tax debt as a result of your audit – by negotiating payment plans, penalty abatements, and other tax relief support.
If you’re facing unexpected tax debt, contact us today to find out how we can help.
What are the IRS audit triggers?
Only about 2% of IRS tax audits are selected completely at random.
There are specific “red flags” that the IRS looks for, which are behind the vast majority of audit selections.
These triggers include:
- High income levels (over $500,000)
- High (or disproportionate) levels of deductions
- Discrepancies between your reported income and what third parties have reported (e.g. on W-2s and 1099s)
- Cash-intensive businesses
- Not reporting a foreign bank account
- Math errors and typos
- Incomplete tax returns
- Not filing a tax return
How far back can the IRS audit you?
There is a statute of limitations that states the IRS generally has three years from the date you file your return to conduct an audit.
However, there are some exceptions:
- Substantial underreporting: If you underreport your income by 25% or more, the IRS can look back six years.
- Fraud: In cases of tax fraud or evasion, there is no time limit for how far back the IRS can audit you.
- Unfiled returns: If you fail to file a tax return, the statute of limitations does not begin until you file.
- An agreement to extend the time limit: The IRS may ask you to sign an agreement or statutory waiver, to extend the time it has to assess your tax.
Generally speaking, the IRS aims to audit tax returns within a year or two of them being filed and processed. If your tax return is flagged for auditing, the IRS will then often include your past three returns in the audit as well.
What happens when you get audited by the IRS?
Although it sounds scary, being audited by the IRS is usually just a straightforward case of mailing the requested documents and information. However, in some cases it may be more complex, which is when it’s a good idea to enlist professional tax audit representation.
The most important thing to do is to act quickly. Ignoring the IRS is never a good idea, and you will quickly face fines and other penalties if you don’t respond within the timeframes stated.
The audit process typically begins with an IRS notice informing you that your return has been selected for examination. Here’s what you can expect:
- Initial contact: The IRS will send a letter detailing exactly what information they need and how you should provide it.
- Preparation: You gather all requested documents, such as receipts, bank statements, and other records that support the items on your tax return, and mail them to the IRS. If you are struggling to find the relevant documents, or are concerned about the audit process, this is the time to enlist tax audit representation.
- Meeting (if applicable): For office and field audits, you (or your audit representative) will need to meet with the IRS auditor in person and provide the requested documentation.
- Review: The auditor will review your documentation and may ask additional questions or request further information.
- Outcome: After the review, the IRS will either propose changes or accept your return as originally filed. If changes are proposed you have to formally agree to them, or you have the right to appeal the decision.
What happens if you fail an IRS tax audit?
The most common result of a failed tax audit is a bigger tax bill.
It’s only in serious cases of tax fraud or tax evasion that there is any risk of jail time or significant fines.
If the IRS finds that there were errors on your return, you will have to pay the additional taxes calculated, plus interest on those taxes. It’s also likely you will be charged penalties.
However, it’s worth knowing that not all IRS audits will result in a penalty. Depending on the exact circumstances of your tax return errors or discrepancies, it’s possible to receive (or agree on) an adjusted tax bill without further penalties.
While we know that any unexpected tax bill can be extremely stressful, don’t worry.
If you can’t afford to pay these additional taxes, there are several options available to you, so you can settle your tax debts in a manageable way. These include installment agreement payment plans, offer-in-compromise agreements, and more.
As experts in tax relief settlement, Tax Relief Helpers can help you find the best settlement options for your situation as well as negotiate everything with the IRS on your behalf, taking all of the stress off your shoulders.
Facing tax debt? Find out how we can helpTips for dealing with an IRS tax audit
If the IRS contacts you about an audit on your tax return, remember – don’t panic!
Most of the time, it’s a much simpler process than people expect. And if not, there are plenty of options to help you through it.
If you are confused, overwhelmed, or worried by the IRS’s audit requests, your best bet is to hire a professional tax audit representative such as a CPA, enrolled agent, or tax attorney. There are many firms dedicated to tax audit representation who will be able to walk you through the process.
If the result of your tax audit is a tax debt, you should also seek professional help. There are a range of payment plans and tax relief programs offered by the IRS, but understanding them all and navigating the process can be stressful and confusing.
At Tax Relief Helpers, our expert team has decades of experience in resolving tax debt for our clients. We know the IRS tax relief programs inside out, and will be able to help you limit the impact of your unexpected post-audit tax bill by negotiating you the best possible tax settlement agreement.
Contact us today for a no-obligation consultation to find out more.