Understanding the IRS audit process is essential to determine your best course of action against an audit. Here’s what to know.
There are few things scarier than the prospect of being audited by the government for your hard-earned money, especially when the result might be a heftier tax bill.
Thankfully, IRS audits aren’t as scary as most might think, and even when they do result in a larger-than-expected bill, you have options for appealing against that decision. Here’s what you need to know about the IRS audit process.
1. The IRS Doesn’t Audit Many Taxpayers
Fewer than one percent of US taxpayers are audited per year, and that number has been in a steady decline for decades. Your overall chances of being audited are very slim – and even then, IRS audit notifications need not be particularly scary, nor are they an indictment of the taxpayer, and don’t presume guilt.
2. The IRS Audit Process Rarely Requires In-Person Visits
The IRS conducts several different types of audits, depending on the nature and scope of the investigation, and the information the IRS has.
The bulk of the IRS’s audits are simple correspondence audits, which typically revolve around asking for and processing information remotely via the mail.
When that isn’t enough, the IRS may ask you to come visit one of their designated offices for an in-person interview. It’s rarer that the IRS requires this level of intervention, but when it does, it is in your best interest to hire a tax professional as a personal representative to ensure that things go as smoothly as possible.
If you fail to respond to any efforts made by the IRS to contact you, they may visit you or your business in the form of a field audit. These usually only occur when the IRS audit process is being ignored.
3. Taxpayers Have Certain Rights When Dealing with the IRS
The IRS has adopted a Taxpayer Bill of Rights that it adheres to when dealing with taxpayers. Both the Independent Office of Appeals and the Taxpayer Advocate Service uphold these rights. Being aware of these rights can help you understand what you should expect during the IRS audit process. They include:
- A right to courteous treatment by IRS employees.
- A right to confidentiality and privacy with respects to tax matters and personal information.
- A right to appeal against the IRS, through them or through the courts.
- A right to know why the IRS is auditing you, and how the IRS will use any information it requests.
- And more.
4. You Might Have Been Selected Randomly
The IRS utilizes computer programs to automatically sort through the taxpayer information it has and identify red flags. These may include a mismatch between a taxpayer’s tax returns and the information returns provided by their employer or credit companies. From there, a person may sort through the potential red flags and send requests for additional information at random.
In some cases, the IRS may select tax returns at random to start a line-by-line audit. These are used by the IRS to collect certain information to refine the IRS audit process.
The IRS has limited resources after all and can only audit so many taxpayers in any given year. Again, audits may be triggered by simple mistakes or irregularities, and do not automatically presume that you’re in the wrong or are in any way trying to defraud the government. In some cases, the IRS may even find that you’re owed a refund on taxes you’ve overpaid.
5. Low-Income Taxpayers Can Get Audited
In fact, there may be circumstances under which low-income taxpayers are more likely to be audited than their wealthy counterparts. The Earned Income Tax Credit, or EITC, is a tax credit or benefit designed to help employed taxpayers making a low or moderate income. However, the qualifications for this tax credit can be quite strict, and if you claim an EITC or ACTC without carefully outlining your qualifications, the IRS may come knocking to verify your claim.
Alternatively, note that the IRS may also contact you suggesting that you claim the EITC if your tax information suggest that you are qualified, and haven’t done so. Consult a tax professional for more information about what tax credits and refunds you may or may not be entitled to, and how best to go about claiming them.
6. The IRS Never Notifies You Via Telephone
The IRS audit process can be exceptionally frightening – particularly when they’re part of an elaborate phishing or identity theft scam. They take great pains to ensure taxpayers understand how they legitimately establish contact with taxpayers whenever they want certain sensitive personal or financial information, and it’s never via an initial phone call.
IRS audits are always started through a mailed notice, sometimes more than one. When the IRS does call, it’s not to start an audit, but to notify a taxpayer of an overdue tax bill after they’ve presumably received their mailed notice. The IRS may resort to phone calls or even unannounced visits, but only after multiple attempts of contacting them via the mail.
The IRS also never asks for debit or credit card information over the phone and suggests that people make payments via the IRS’s online payment portal instead. If the “IRS agent” on the other end of the line makes threats to coerce personal information, especially regarding revoking professional licenses or immigration status, that’s a giant red flag.
If you think you are being audited by the IRS, be sure to check through your mail first. Next, contact the IRS yourself for more information on your tax account and any outstanding bills.
7. The IRS Can Usually Only Audit Returns Filed Within the Last Three Years
There is a limit to how far back the IRS can audit a tax return, and that limit is about three years. The IRS can seek to extend that limit under specific circumstances, up to six years, or longer if they find that a taxpayer may have been engaging in fraudulent or criminal behavior.
If the IRS needs more time to conduct their audit, they may request an extension of the statute of limitations. You can agree to this if you believe you may be entitled to a tax credit or refund and have the information/evidence to support that belief.
Why Seek Professional Help?
Audits are concluded in one of three ways:
- Either the IRS finds that no change is necessary
- They find that some changes are necessary and that you agree with them (you may have to deal with a tax bill), or;
- That some changes are necessary and you disagree with them.
In both latter two cases, having a team of tax professionals around to help you can be a massive boon.
Rush Tax Resolution brings to the table decades of combined experience in dealing with the IRS, helping clients ensure that their rights as taxpayers aren’t infringed upon while delivering clearheaded advice for dealing with tax problems and potential costs.