Quick Facts on IRS Audits

Quick Facts on IRS Audits

For many taxpayers, the mere mention of an IRS audit can bring on feelings of stress and worry. However, understanding the process and preparing ahead of time can help alleviate some of these concerns. In this article, we will explore the quick facts on IRS audits, including what triggers an audit, the types of audits, and how to handle an audit if it occurs.

What Triggers an Audit?

The IRS uses a variety of methods to tax returns for audit, including random ion, computer screening, and investigations. However, there are also certain red flags that can increase the likelihood of an audit:

– Filing errors: Simple errors on your tax return can sometimes trigger an audit. For example, forgetting to sign your tax return or misreporting income can set off alarm bells for the IRS.

– High-income earners: Those with high incomes are more likely to be audited, as their tax returns are complex and often involve many deductions and credits.

– Self-employment income: If you are self-employed, you may be audited more often due to the increased potential for misreporting income and expenses.

– Large deductions: Claiming large deductions, such as for charitable donations, can sometimes draw the IRS’s attention.

– International transactions: If you have foreign bank accounts or conduct business overseas, you may be subject to additional scrutiny from the IRS.

Types of Audits

There are three main types of IRS audits: correspondence audits, office audits, and field audits.

Correspondence Audits

A correspondence audit is the least intrusive type of audit and is usually conducted via mail. If the IRS needs more information or wants to question a specific item on your tax return, they will send a letter requesting additional documentation or clarification.

Office Audits

An office audit is more serious than a correspondence audit and requires you to visit an IRS office. During an office audit, an IRS agent will review your tax return and supporting documents in person to determine if any adjustments need to be made.

Field Audits

A field audit is the most comprehensive type of audit and involves an IRS agent coming to your home or place of business to review your financial records. Field audits are generally initiated when the IRS suspects more serious tax violations, such as substantial underreporting of income or large deductions.

How to Handle an Audit

If you are ed for an audit, it is important to be prepared and respond promptly to any requests from the IRS. Here are some tips for handling an audit:

– Review the audit letter carefully: The letter from the IRS will provide instructions on what documents are required and the deadline for submitting them. Make sure you understand what is being requested and respond promptly.

– Gather all relevant documents: The IRS will typically request copies of your tax returns, receipts, and other financial documents. Gather all the necessary items and organize them in a clear and easily accessible manner.

– Seek professional help: If you are unsure how to respond to the IRS or if you feel overwhelmed by the audit process, seek help from a tax professional.

– Be polite and cooperative: If you are audited in person, treat the IRS agent with respect and cooperation. Answer all their questions truthfully and provide any additional information they request.

It is important to note that not all audits result in a change to your tax liability. Many audits are simply a routine review of your tax return and result in no changes or adjustments.

Conclusion

While IRS audits can be a daunting prospect, understanding the process and being prepared can help ease some of the stress. By avoiding errors on your tax return and keeping good financial records, you can minimize your chances of being audited. And if an audit does occur, being organized, cooperative, and seeking professional help can help you navigate the process successfully.

If a business or an individual is being audited, the best thing they can do is talk to either an auditor or a tax professional to see how to prepare for the IRS audit.

Generally, the IRS audits will be justified, and the company or individual will be able to clearly understand why exactly they are being audited. Every year when taxes are filed with the IRS, audits occur soon after. The information that one submits for their taxes then gets entered into the computer and assigned a numerical score.

This score determines whether or not a company or an individual will be audited. Items that alters the score and may lead to an IRS audits include: low gross profit margin, high auto expenses, high business use of vehicles, high travel, vast amount of entertainment,  and little profit from business operations.

There are different types of IRS audits which include correspondence audits which is generally used for small simple tax returns, field audits which will generally contact the owner of the company via the telephone to interview them about the company, and a TCMP audit, or Taxpayer Compliance Measurement Program audit. This type of audit takes longer and looks through all documents.

If a person is being audited,  it is important to be: timely, organized, supply the auditor with the documents needed,  during an IRS audit never give more or less information that is being asked for,  be honest and do not try to argue or become defensive about any questions being asked, and never use copies of documents.