The IRS might need more personnel to audit every taxpayer who files a return with an error or a slight mistake, but it does try to investigate as many returns as possible. This results in hundreds of thousands of audited returns each year, representing a fraction of a percent of all taxpayer returns. Thus, your chances of getting audited are relatively low. But when it does happen, it helps to be prepared and understand how the IRS audit process works.
Understanding What a Tax Return Audit Is and How It Works
All IRS audits are either in-person audits or correspondence audits. Most audits are correspondence audits. As the name implies, these are entirely impersonal audits conducted via the postal service. The IRS sends you a notice, asks for supporting documents, and processes these documents once you’ve sent the required copies. Some time passes, and the IRS makes a judgment on your tax return.
In-person audits are usually reserved for larger incomes or more significant tax problems. They involve either office audits (where you are invited to a nearby IRS field office) or field audits (where the IRS comes over to your business to look at your books in person).
The last thing you should do is panic. An IRS investigation is not an extreme suspicion of guilt, and the IRS explains that its auditors are generally amicable. Neither of you should be looking for a confrontation. Ultimately, most tax errors are honest mistakes, and most tax audits result in minor changes. But again, being prepared for the worst helps.
Do I Need Legal Representation?
Legal representation is optional for most correspondence audits but is highly recommended if the IRS wishes to investigate and interview you in person. Even if you intend to represent yourself, it is still a good idea to talk to a tax professional to know what you should expect.
If you do seek out legal representation, be prepared to fill out Forms 2848 and 8821. Form 2848 is an extraordinary Power of Attorney document authorizing a tax professional to represent you before the IRS, while Form 8821 is an information request form that tax firms and tax professionals must use to access certain documents for your case.
Should I Audit Myself?
An excellent way to prepare for a tax return audit if you expect an in-person audit is to talk to a professional about a mock audit. CPAs and tax attorneys can take a closer look at your finances and help you determine what the IRS will pay the most attention to. This is an excellent way to prepare yourself for what may come out of an IRS investigation, but the result is never set in stone. Auditors are only human and can miss or gloss over one detail to focus on another.
What If I Don’t Have My Documents?
Once the IRS announces its intention to audit your account and asks you for specific documents, you must try to retrieve them. The IRS itself has a copy of your tax return. You can fill out Form 4506 to request a transcript of your return, which can be an excellent place to start. You will generally want all the items you would have used to write that return.
From there, try to work backward. Call your employers, clients, banks, and other financial institutions. Call your doctor, the hotel you booked on vacation, the car rental service for your company car, or your child’s school. Establish as many supporting documents as you can.
If you don’t have what the IRS is looking for, they will have to be satisfied with an oral interview. The downside is that, without supporting documents, you won’t have a strong defense for deductions or tax credits that the IRS might find unreasonable or strange for your circumstances.
Be Neat and Cooperative
Remember to try to trick, overwhelm, or annoy the IRS agent in charge of your tax return audit. You aren’t trying to make friends, but making an enemy is also a bad idea. Be polite, and try to produce as many supporting documents as possible in an organized fashion.
You don’t need to show them anything they aren’t asking for, but make sure that you show them what they are asking for and that it’s well-organized and prepared. Being forthcoming in the early stages of an investigation can help make a positive impression. Your IRS auditor might even decide to skip over a minor point they would have otherwise stressed if you were unpleasant.
Keep Your Wits About You
IRS auditors aren’t interrogating you for treason, but they aren’t a friend or personal acquaintance either. They may ask pointed questions or request information you might not currently have. Offer to send the data later if you can find it or look to your lawyer or legal representative for help. Don’t crack under pressure – and don’t say too much.
One of the reasons legal representation is often paramount in a tax return audit is because you can readily divulge information by accident – auditors are explicitly trained to pick up on such cues and poke further, gaining a potential insight towards a decision they would have never made if you hadn’t said anything at all.
What Happens at the End?
Auditors can be flexible, depending on the circumstances and your level of cooperation. You can agree or disagree on any given point, fight the auditor’s decision, seek to provide more evidence, or compromise. For in-person audits, the auditor will give you the rundown of every proposed change to your tax return based on their investigation.
You will likely receive a list of suggested changes for correspondence audits in the mail. Again, you have the right to challenge any or all of these. However, that right is time limited. If you intend to appeal against an IRS judgment on your tax account, act as swiftly as possible, and seek legal help immediately.
Once a decision is made that everyone involved agrees with, you will end up with either no change to your tax return audit, underpayment (meaning you owe a tax debt for a mistake or missed income), or overpayment (in sporadic cases, the IRS might give YOU money back).
Owing the IRS money can be dangerous. IRS penalties and interest rates are steep, and the IRS employs several compelling collection tools to coerce payment. If your debt is low enough, consider settling it as soon as possible.
If you have no reason or evidence to appeal against the IRS’ decision to charge you more tax, your best bet is a direct payment or, if your debt is too large for a single lump sum but under $50,001, a streamlined installment agreement. Streamlined installment agreements can be set up online via the official IRS.gov website by logging into your tax account with your ID.me information or IRS username.
If you have questions or concerns or want to know more about preparing for an IRS audit and dealing with the aftermath, contact us at Rush Tax Resolution.