What Happens During an IRS Audit?

An IRS Audit

An IRS audit can be a scary and stressful experience, but armed with the right knowledge, you can approach the situation confidently and fearlessly. To help you prepare, this guide explains the types and stages of an audit. It also outlines how the IRS will contact you and what to expect during and after the audit.

To get help navigating the audit process, contact Wiggam Law today by calling (404) 233-9800 or completing our consultation form. In the meantime, here’s an overview of what to expect when the IRS audits you.

Understanding Tax Audits

Why does the IRS audit tax returns? The IRS audits tax returns to ensure taxpayers comply with tax regulations. Audits play an essential role in helping encourage compliance. Theoretically, if taxpayers didn’t have the “threat” of an audit over their heads, they may be more likely to file false returns.

There are several types of audits, including the following:

  • Correspondence — You communicate with the auditor through the mail. They send you letters letting you know what they want, and you send in the requested information.
  • Office/desk — You meet with the auditor in their office, and you bring the documents that they have requested.
  • Field — The auditor comes to you. Generally, this only happens with business audits. While auditors may come to your place of business, they rarely come to your home.

In many cases, the audit may happen over the phone or with a combination of mailed correspondence, phone calls, and in-person meetings. Often, the auditor may request information by sending you Form 4564 (Information Document Request).

How Will the IRS Contact Me?

If the IRS selects your return for an audit, the agency will send you a letter in the mail. This letter, most commonly known as an audit or examination letter, is a notice that outlines the scope and type of audit. It also lets you know how long you have to respond. Pay careful attention to the deadlines. If you miss a deadline, the auditor may adjust your return and assess a tax liability against you without your input.

Note that the IRS will never initiate an audit through email or social media, so be cautious of fraudulent communication claiming to be from the IRS. Scammers use people’s fears about tax audits to trick them into giving away sensitive information or money. If you are unsure about the legitimacy of a notice, you can reach out to the IRS or a tax professional to determine if your audit notice is real.

Is a CP2000 Notice an IRS Audit?

A CP2000 notice is not an audit notice. It is a notification that the IRS has made changes to your tax return. Generally, you receive this notice when the IRS believes you have underreported your income.

The notice should explain the changes and note how much you owe. It should also outline what to do if you disagree. You may lose your chance to appeal the changes if you don’t respond promptly.

Keep in mind that the IRS is not always correct. Many people assume that the agency doesn’t make mistakes, but it often makes incorrect changes to taxpayers’ returns. Consult with a tax professional if you’re unsure about the accuracy of your proposed tax liability.

How to Respond to the Audit Notice

Ideally, you should respond promptly and professionally to the audit notice. That shows the IRS that you’re willing to cooperate through the process. Again, pay very careful attention to the deadlines. If you need extra time, contact the agency directly. The IRS will generally give you an automatic 30-day extension if you need more time.

Pay close attention to the requests in the letter. Some audits only examine a certain portion of your tax return, while others look at your full return. The supporting documents you need to provide vary based on the scope of the audit.

Why Was I Selected for a Tax Audit?

While some audit targets are selected randomly, others are triggered by red flags or discrepancies found on tax returns. The IRS uses sophisticated computer programs to look for potential issues or inconsistencies. For instance, you may be audited if the IRS receives a document from a third party about you, and that information doesn’t appear on your tax return.

The IRS also compares the information on your return to information on similar returns. For instance, it could be a red flag if you have a substantially lower income than most people in your area or if your expenses take up a higher portion of your revenue than the average for your industry.

Unusually high deductions, substantial changes in income, or involvement in certain industries can also increase the likelihood of being selected for an audit.

How to Prepare for a Tax Audit

If you want the audit to go as smoothly as possible, you must be prepared. Keep the following tips in mind:

  • Review the audit notice carefully — Review their requests carefully to ensure you’re on the same page with the auditor. If you have questions, reach out before your meeting so that you ensure you have everything covered.
  • Schedule the audit — In most cases, you must contact the auditor to schedule the audit. Typically, the IRS spells out the timeframe for you, but then, you work with your auditor to select a certain day and time.
  • Gather documents — Gather all of the documents that the auditor requested. This may include bookkeeping records, sales reports, proof of deductions, and other details.
  • Find supporting documents — You may need multiple records for some of the claims on your tax return. For instance, if you deducted a lunch as a business expense, you may need to show the purchase on your business credit card or bank account, but then, you may also need to provide notes about why the meal was business-related.
  • Consult with a tax professional — Audits can be very complex. In addition to providing documents, you may also need to explain your interpretation of the tax law. A tax attorney with audit experience can be critical for this. To maximize their assistance, you may want to hire them as soon as you receive the audit notice, but keep in mind that you can hire a pro at any time during the audit process.

What to Expect During the Audit Process

Here’s a breakdown of what typically happens during an IRS audit:

  • Initial Interview: The audit process usually begins with an initial interview. Again, this may be conducted in person, by phone, or through written correspondence. During the interview, the auditor will explain the purpose of the audit, the areas of focus, and the records required.
  • Document Review: After the initial interview, the auditor will examine the documents and records you have provided. They may request additional documentation or clarification on certain items.
  • Follow-Up Inquiries: The auditor may have follow-up questions or requests for additional information throughout the audit process. Ensure you respond promptly and accurately but don’t give information you’re not required to share. You should cooperate with the auditor while also being mindful of your rights.
  • Audit determination: Once the auditor has reviewed the information and covered all of their follow-up questions, they will issue a determination about the audit. Their determination will let you know if they agree with your tax return or plan to make changes.
  • Your response: At this point, the audit is still not set in stone. If you agree with the changes, you can let the process proceed and pay the tax liability. If you disagree with the changes, you will need to dispute the auditor’s findings.

During the audit process, you should keep copies of all the correspondence, records, and documents that you shared with the auditor and that they sent you. This gives you a clear record of the process, and it also gives you proof of any mistakes made by the auditor.

What Happens if a Tax Audit Finds Discrepancies?

If the IRS finds discrepancies between the information on your tax return and the documents you have provided, the agency can adjust your return. Generally, this leads to a tax bill, but the agency can also make changes that reduce your tax liability.

The auditor may assess audit penalties if there were significant issues on your return. This includes accuracy and fraud penalties. Again, however, you will get a chance to respond before the discrepancies turn into a tax assessment with penalties.

Common Tax Audit Problems

Usually, when an auditor makes changes to your return, they have discovered unreported income, falsely claimed deductions or erroneous credits. Here are some of the common reasons people fail audits:

  • Unreported Income: Failing to report all of your income, including business revenue, freelance earnings, rental income, and cash payments, can cause you to fail an audit.
  • Questionable Deductions: Excessive or unsubstantiated deductions can also cause you to fail an audit. This includes both personal and business deductions.
  • Cryptocurrency Transactions: The IRS is paying close attention to cryptocurrency-related transactions. If the auditor discovers unreported gains, you will fail the audit.

These are just a few examples. Any incorrect information can cause you to fail a tax audit, and remember, the IRS can audit all kinds of tax returns. The agency doesn’t just audit personal income tax returns, and the issues vary depending on the type of tax return. For instance, say you claimed an employer retention credit (ERC) on a payroll return. If the auditor disagrees with your claim, they may take away the ERC.

Addressing Tax Audit Discrepancies

If discrepancies or issues are identified during the audit, you should address them directly. Here are some key steps to take:

  • Make Sure You Understand the Auditor’s Issue: To craft the best response, ensure you understand the issue the auditor has with your tax return. If you are confused, consult a tax professional with audit experience. You may also need to consult with the person who prepared your tax return if applicable.
  • Provide Accurate and Complete Information: If you disagree with the issues found by the auditor, be transparent and provide the auditor with information to address the identified issues.
  • Seek Professional Guidance: A tax attorney can help you deal with the auditor, and they can be invaluable if complex issues or legal interpretations come up during the audit.
  • Dispute or Appeal: If you believe the auditor’s findings are incorrect or unjustified, you may be able to dispute or appeal the audit results. Consult with a tax professional to ensure you take the right steps.

Note that how you address discrepancies during the audit process varies from how you respond to discrepancies after the audit has concluded. During the audit, you will most likely be having a back-and-forth conversation with the auditor, but after the audit, you have to follow a set appeals process.

What are the Potential Outcomes of a Tax Audit?

After undergoing an IRS audit, there are several possible outcomes, including the following:

  • No Change Audit: In some cases, the IRS may accept your tax return as originally filed. This means the IRS agrees with how you reported income, deductions, or credits on your tax return.
  • Audit Changes: Another possible outcome is when the IRS auditor proposes adjustments to your return. These proposed changes may involve increased income, reduced deductions, or disallowed credits. All of these changes will increase your tax liability.
  • Penalties: If the auditor finds significant errors or thinks you disregarded the tax law during the audit, the agency may assess penalties against you. The specific penalties will depend on the severity of the issue, but you may be able to request abatement of the penalties.

If the auditor proposes changes, you have the right to appeal or negotiate with the IRS. As long as you respond by the deadline on the audit determination, you can appeal without paying the assessed tax. However, if you miss the deadline, your only option may be to pay the tax under protest and then request a refund.

What if I Need to Appeal a Tax Audit Decision?

If you disagree with the outcome of an IRS audit, you have the right to appeal the decision. Here’s an overview of the steps involved in appealing an audit decision:

  • Review the Audit Report: Before initiating an appeal, review the audit report and the IRS’s findings carefully. Ensure you understand the proposed adjustments and the information the auditor used to reach their conclusion. To create a strong appeal, you need to understand where the auditor is coming from.
  • Contact the Auditor: In some cases, you may be able to resolve the issue by talking directly with your auditor but keep in mind that the auditor’s role is to represent the IRS. They may not be impartial.
  • Request a Meeting with the Supervisor: If you cannot resolve the issue with the auditor, you can request a meeting with their supervisor. This allows you to present your case to a higher-level authority who may have more knowledge about the tax laws. Ensure you have documents to support your position and be ready to address any factual or legal issues you believe were overlooked during the audit.
  • Pursue Mediation: If you can’t come to a resolution with the auditor’s supervisor, you may want to consider mediation as an alternative dispute resolution option. Mediation involves a neutral third party who helps facilitate the conversation between you and the IRS.
  • File a Formal Appeal: If you can’t work out a resolution with the auditor or their supervisor, the IRS will issue a determination letter. Then, you can start the formal appeals process. You will need to write a protest explaining why you disagree with the audit findings. Then, the Office of Appeals will provide an independent review of your case.

The appeals process is complicated and has strict deadlines. Even if you didn’t work with a tax pro during the audit, you should seek professional help during the appeals process. An experienced tax attorney can provide valuable insights and help you present your case effectively. Their expertise can significantly enhance your chances of a successful appeal.

Statute of Limitations on Tax Audits

How long does the IRS have to audit your tax returns? Generally, the agency has three years after the filing deadline to audit your return. If you filed after the deadline, the statute of limitations doesn’t start until the day you filed. There is no statute of limitations on fraudulent or unfiled returns.

Note that the statute of limitations to file business tax returns is also three years. However, the clock doesn’t start ticking for payroll returns until April 15th, following the tax year related to the return. That gives the IRS extra time to select these returns for an audit.

Get Help With a Tax Audit

IRS audits can be stressful and time-consuming, and a tax professional can be invaluable through the process. An experienced tax attorney can provide guidance, protect your rights, and help present your case effectively.

If you are facing an IRS audit, the team at Wiggam Law strongly recommends that you work with a qualified tax professional who can provide personalized advice and support tailored to your specific situation. To get help now or to just talk about your situation, contact us today by calling (404) 233-9800 or filling out our consultation form.

Remember, having professional representation can increase your chances of a favorable outcome and alleviate the stress associated with the audit process. Don’t go through this process on your own. Instead, let us lift the burden off your shoulders and deal with the IRS for you.