No one volunteers to undergo a federal income tax audit. During an audit, your tax forms and financial documents are reviewed to ensure you filed your taxes correctly. If you do not keep your financial records in order, an audit can be a drawn-out, grueling process. That being said, an audit is simply the government’s way of verifying that you are adhering to the applicable tax laws.
What Happens in an Audit
In general, the taxpayer receiving the audit will be informed of which details on their tax return are being examined. The IRS evaluates these details in one of three different methods:
1. Correspondence Audit
A correspondence audit is completed through phone calls, emails, and mail, normally occurring over the course of a few months. The taxpayer and auditor never meet face to face. Most audits will proceed in this manner during the pandemic.
2. Office Audit
In an office audit, the auditor requires that you attend their IRS office for a meeting, which could last several hours.
3. Field Audit
The auditor conducts a full audit while at your workplace. These types of audits can last for days.
Regardless of the type of audit, it is best not to volunteer any information beyond what the auditor is requesting. Avoid over offering details to questions where a one-word answer would suffice.
Why You May Be Getting Audited
The chances of having to undergo an audit are fairly low— the odds have decreased in the past decade. That being said, the IRS will contact you directly for clarification if something on your tax return raises a red flag.
A tax return may be randomly selected by a computer system called the DIF, which detects anomalies in tax returns to be later reviewed by human agents. For example, the system compares tax returns to those of other taxpayers who earned roughly the same amount.
Avoid making any of these mistakes when filing your taxes to decrease your chances of getting audited:
● Failing to disclose sources of income. You must report salaried income (Form W-2) and self-employed income (Form 1099).
● Not reporting cryptocurrency transactions. Cryptocurrency must be reported as though it were regular money.
● Making any typos or miscalculations. Double-check your numbers and additions before submitting.
● Using a lot of round numbers for itemized deductions. Be as accurate as possible and avoid rounding expenses by inserting the exact amount unless estimating.
How Far Back Can The Audit Go
The statute of limitations authorizes the IRS to examine your financial records from the past three years. However, If a tax return contains a blatant error, the IRS can look back at tax documents up to six years old. It is advisable that you keep a record of these documents since they may be requested of you during the audit.
How To Know If It’s a Real Audit and Not a Scam
A notice for an audit is sent in writing, normally by mail, which initiates the auditing process. Beware of any text, email, or phone call claiming it is the IRS and threatening arrest if you don’t pay taxes. The IRS will ensure you are properly notified before an investigation begins. Any immediate demand for money is likely a scam.
If You Cannot Afford to Pay the Bill
There are only three different possible outcomes of an audit: you will owe the government money, the government will owe you money, or the auditor accepts the tax return originally filed and no money is owed. If your audit result is the first option, and you cannot afford to pay at present, ignoring the audit’s results will not make them disappear and will lead to penalties and fines. If you cannot immediately pay off the tax debt, the IRS offers tax payment relief options or can potentially offer a compromise. Otherwise, if you strongly disagree with the audit’s findings, you can appeal the audit.
When to Hire a Professional
If you’ve received notice that you are being audited, avoid becoming frustrated and remind yourself that this is standard government procedure. If the audit is beyond the simple correction of a typo, you may want to hire representation to help you handle the audit from start to finish. K&S Law Group has a team of expert lawyers who routinely deal with auditors. If you are concerned about an audit impeding your ability to work, consider hiring a lawyer at K&S Law to represent you.