- Posted by Kristi Cherry, CPA®
- On July 2, 2019
- audit, IRS, tax planning, taxes
No one wants to receive that dreaded letter from the IRS saying you will be audited. Going through the audit process can be intimidating, confusing, and time-consuming.
Although the likelihood of an audit is small, it’s quite possible that you or someone close to you will go through the process at some point in your lives. According to the IRS, nearly 1 million tax returns were audited in 2018, which is roughly 0.5% of the 196 million returns filed.1
So, why might you be chosen for an audit, and what should you do if you are?
In this blog post, we explain the main types of audits and possible reasons you or a loved one could be audited, how to prepare for an audit, and what comes next after the audit is completed.
TYPES OF AUDITS
The type of audit used by the IRS is determined by how severe they believe tax code violations were within a previous year’s filing. There are three main types of audits:
- A correspondence audit is performed through the mail. This audit is limited in scope and are designed to address simple computational errors or issues involving small sums of money.
- When a taxpayer is asked to meet with IRS examiners at an official IRS office, this is known as an office audit. During this meeting, the IRS inspects hard copy records and interviews the taxpayer to gain more information about a return’s accuracy.
- The most in-depth form is a field audit, which is used when the IRS suspects more severe tax code violations. During a field audit, the IRS will come to your home or business and inspect records. This process typically takes one day to one week.
WHY AM I BEING AUDITED?
Typically, an audit is initiated because the IRS believes that a tax filing was inaccurate or did not comply with the tax code; however, a tax audit does not necessarily imply suspicious or criminal activity. The fuller our lives become, the more complicated filing our taxes can be. A tax audit is simply an examination to gather more information about a filing that did not follow standard norms – it’s not a trial. Let’s review some additional reasons you or a loved one could be audited.
Under reporting income
Any institution that distributes income to you during the year is likely claiming that income as a business expense within their own filings. The IRS then compares distributed income to claimed income, looks for any discrepancies, and tracks down the “missing” income. However, the IRS recognizes there is a difference between negligence and tax fraud. Just remember to double check your return filing for any errors or omissions and ask someone you trust to check it over as well.
Breaking foreign account rules
Some people choose to incorporate an offshore bank account into their financial plan. In the past, you only needed to check a box attesting to the fact that you held foreign accounts. Now the IRS requires you to provide more detailed information about accounts held overseas. Failing to provide this information can lead to an audit, but simply having foreign accounts may increase your odds as well.
Claiming excessive business tax deductions
The line between business and personal expenses is easily blurred and, unfortunately, the tax code is not always explicit when it comes to which expenses can be deducted. If the IRS feels that your business deductions are unusually high relative to your income, it could trigger an audit. Don’t be afraid to claim deductions for legitimate business expenses, just make sure all your expenses can be verified with documentation.
Being a high-income earner
Typically, a higher income dictates a more complex tax return, which leads to a greater probability of errors and omissions. While your income level doesn’t guarantee a tax audit, it could be a contributing factor. If you’re worried about the complexity of your tax return, working with a CPA is a great way to help avoid mistakes that could warrant concern from the IRS.
HOW TO PLAN FOR AN AUDIT
If you are being audited, the IRS will notify you by mail first. Remember, the IRS will never email you asking for personal information. Any email you allegedly receive from the IRS is fraudulent. Once you are notified by the IRS, you have 30 days to respond to the audit notice. Do not delay your response as that can add interest to the amount you owe the IRS.
After you’ve responded to your audit notice, it’s time to gather and organize the documents the IRS has requested. Possible documents could include:
- Home mortgage statements
- Previous tax returns
- Brokerage statements
- Retirement account records
- Pay stubs
As you organize and double check your paperwork, you may want to ask a CPA to review your documents as well. Additionally, as you plan for your audit, it’s important to weigh the option of seeking legal counsel. If your audit requires an in-person meeting, a legal representative can go in your place.
WHAT COMES NEXT?
After the IRS initiates an audit, there are three ways that the audit can conclude.
- The best-case scenario is that the IRS decides that no changes are required.
- The IRS identifies inaccuracies to which you agree, and then you settle any difference.
- The IRS can propose changes to which you disagree. If you disagree with the changes, you can ask for a conference with an IRS manager, request mediation, or file a formal appeal.
DO YOU NEED TAX-RELATED ASSISTANCE?
Partnering with a CPA is an excellent way to help you avoid mistakes that could possibly trigger an audit. RAA Tax Services offers tax return preparation to help ensure your tax filing is accurate and in compliance with the tax code, as well as tax planning to help you take advantage of any tax strategies and minimize your tax liability over your lifetime.
If you are audited by the IRS, our Tax Services team can help you navigate the process. While the audit process may feel overwhelming, working with a professional can minimize any negative effects and prepare you for the future.
If you are being audited and need guidance, or if you would like to learn more about RAA Tax Services, please request more information via email or phone call by filling out the form below.
1Information obtained from the Internal Revenue Service report titled “Enforcement: Examinations”. The Internal Revenue Service is an independent third party and is not associated with RAA.
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