When most people are asked to take picture of an IRS audit, they likely think about a federal agent coming to knock on their door with a suitcase full of the necessary paperwork, and not an ounce of humor. The encounter is typically followed by a series of cutting questions about the financial details of your business and personal life, and an invasive look into every receipt, balance sheet, and bank statement they have ever filed. Receiving an IRS audit letter can be an intimidating situation.
In truth, very, very, very few Americans will ever face the prospect of an IRS audit. And even fewer people will ever need to be face-to-face with an IRS employee to complete the audit. The vast majority of IRS audits are mail audits – meaning the entire process is conducted and concluded over hard copy correspondence, sending documents and requests for information back and forth over a few weeks or months.
However, just because you likely won’t need to look into the eyes of your auditor doesn’t mean the process isn’t one you should be adequately prepared for. As rare as IRS audits are, the IRS intends to conduct them thoroughly and may request documents you haven’t had to dig up for a few years. If you’ve received 2an IRS audit letter or notice informing you of an impending IRS correspondence audit, it helps to know what you’re in for.
What Does an IRS Audit Letter Look Like?
For the taxpayer, the IRS audit begins with a notice of audit via mail. Not all correspondence sent by the IRS is a notice of audit – the IRS may also contact you to inform you of your eligibility for a tax credit, for example, or to notify you that there was a math mistake on your tax return and that it had been rectified and the difference taken out of your credit/refund. The IRS will only send you a notice of audit when they don’t have all the information and need clarification before making a judgment on your tax account.
If, for example, you have a suspicious or unusual detail in your tax return – such as a deduction that most people in your line of work and your region do not qualify for – then the IRS’s first move will be to issue a notice of audit alongside a request for additional information about specific items on your return, detailing what those items are. An IRS audit letter does not automatically spell trouble. If you provide them with the necessary information, the IRS may decide that your return is legitimate and make no changes. If they find that you made a mistake, they may make a change and charge the missed tax. If you made a mistake in your favor, the IRS might even issue you a refund for the money you overpaid.
IRS audits can take weeks or even longer. The IRS has no interest in rushing through the process as quickly as possible – they have a total of three years to make a judgment on your return from the moment it’s sent in. This is called the assessment statute of limitations. The average IRS audit generally takes no more than 26 months, give or take. This is the timeline the IRS presents its agents to incentivize faster audit resolutions.
An exact timeline depends entirely on the circumstances of the audit – the simpler the mistake or details of the concern, the faster it’ll be over. If you overpaid, for example, the IRS has a greater interest in resolving an audit as quickly as possible because the IRS pays interest to taxpayers when it owes a refund due to overpayment. More severe or egregious audits may take time to build, and the IRS might wait longer to engage you and may request more documents.
IRS Mail Audits vs. Office Audits
Most audits are conducted via mail (mail or correspondence audit). The IRS will detail precisely what they need from you and make their judgment based on the information you provide. Because you’re sending confidential financial information to a government agency, it is in your best interest to be as thorough and forthright as possible. Trying to withhold or lie will worsen things and extend the process needlessly.
There are multiple ways to appeal a decision by the IRS before an ultimate decision is made. If you disagree with the judgment the IRS makes, you have a chance to appeal. In this case, it is strongly recommended that you talk to a tax professional first. If the IRS requests that you meet face-to-face (office or field audit), you may also want to speak with an attorney for personal representation. Dealing with an IRS audit can be stressful, and you want to ensure that you remain as calm and collected as possible.
A legal professional with tax expertise will be your best bet at navigating the minefield of IRS audits and coming to a swift and equitable resolution. Look for a tax attorney, a CPA, or an enrolled agent. Whether your audit is in-person or over the mail, if you have specific questions about how to best handle the IRS in your situation, it is always a good idea to consult a tax professional.
What Will the IRS Be Looking For?
The IRS has several game plans for different situations, industries, and circumstances. Their official IRS audit technique guides may give you a better idea of what to expect when the IRS launches an audit. Note that the IRS usually wants you to keep any records relevant to your tax return for at least three years before you throw them out. When launching an audit, the IRS may ask for:
- Receipts
- Bills
- Canceled checks
- Divorce settlements
- Tax advice
- Loan agreements
- Financial logs/diaries
- Ticket stubs (business trips, etc.)
- Medical records
- Employment documents
- Theft/loss of documents
- And more.
When Do You Need to Worry About an IRS Audit Letter?
Only about one percent of taxpaying Americans earning between $1 and $1,000,000 a year will be contacted for an IRS audit. The reasons can vary greatly, but most IRS audits are identified automatically through computer-generated comparisons tracking trends in incoming tax returns and comparing tax returns with existing individual and information returns to discover potential red flags. When a red flag is identified, a human tax auditor reviews the case before conducting an official investigation.
The exception is an audit launched in coordination with a fraud investigation. The IRS may audit the account thoroughly if a taxpayer’s account is tangentially linked yet not necessarily involved with a potential criminal case. If you have been selected for a correspondence audit, stay calm and take deep breaths. A tax professional can help you work through the step-by-step process of meeting the IRS’ demands and minimizing your chances of a negative outcome.