If the IRS sends notice that you’re being audited, you’re likely to become anxious. However, not all audits mean you did something wrong. In most cases, it is simply a matter of verifying information on a tax return or perhaps correcting a minor error. Knowing what to expect – and how to respond – can help alleviate stress and make the audit more manageable.
An IRS audit (also referred to as an examination) is a review of your records to confirm that the information on your tax return was reported accurately and follows tax law. The best way to prepare for an audit is to respond on time, present organized and complete records, be cooperative, and communicate professionally.
Technically, most audits are triggered via an automated scoring system referred to as the DIF, which stands for Discriminant Information Function. The system flags something on your tax return that stood out. This could be inconsistencies, missing income, unusually high deductions, or inputs that don’t match information the IRS already has. Here are three key facts about IRS timing for audits:
- The IRS generally looks back three years based on the statute of limitations
- Most audits are related to returns filed within the past two years
- In cases of substantial errors, audits can extend up to the last six years, especially in cases where it is believed that more than 25 percent of gross income was omitted from the filing
- There is no statute of limitations in cases of fraud or failure to file
The Audit Process
Almost all IRS audits start with a letter stating that your return has been selected for examination. This notice will be sent by mail – not a phone call, text, or email. The letter will include the name of your assigned reviewer, his or her IRS identification number, and phone number. You should call the IRS directly to verify this information, as scammers are known to impersonate the IRS to steal money or personal data.
You may be asked to provide a variety of specific documents based on what issue(s) triggered the audit. Be sure to provide copies, not originals. Depending on your situation, the requested documents could include:
- Income records
- Investment statements
- Bank forms
- Receipts and bills
- Canceled checks
- Legal documents (such as divorce or custody agreements)
- Loan agreements and settlement statements
- Travel logs, diaries, or ticket stubs
- Medical and dental records
- Theft or loss of documentation (insurance claims, photos, police reports)
- Employment records
- Schedule K-1 forms for partnerships or S corporations
The following are the three types of IRS Audits:
Correspondence Audit – These are the least complex and are conducted entirely by mail. Sometimes the IRS simply identifies a math error or missing income and asks for payment or clarification. You can either pay the amount due or respond with documentation if you believe the IRS is incorrect.
Office Audit – An office audit requires you to visit an IRS office with the requested records. You will receive an Information Document Request (IDR) form detailing what to bring. Showing up with organized records can help resolve these audits quickly.
Field Audit – The field audit is the most extensive. An IRS agent will come to your home or business to review records. Although you will receive an IDR in advance, the agent may decide to escalate the review if he notices any “large, unusual or questionable” (LUQ) items.
The key points to remember are that poor recordkeeping and/or lack of cooperation tend to trigger a more detailed and time-consuming audit.
Once the Audit Is Complete
After the audit, the IRS will issue a report describing its findings. It may determine that no changes are necessary to your return; that you owe additional tax; or that you may be owed a refund. Should you disagree with the findings, you have options:
- Request to meet with an IRS manager
- Use mediation or alternative dispute resolution
- File an appeal with the IRS
- Take the case to court if necessary
If you agree with the audit findings, you’ll need to sign the examination report and choose from various payment options if you owe any taxes.
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