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December 2, 2019

Knock, knock. It’s the IRS, and you better open up.

The Internal Revenue Service (IRS) is a government agency responsible for collecting taxes, providing tax assistance, and ensuring every citizen abides by federal statutory tax laws. However, the most dreaded function of the IRS for citizens is the audit. Even if you have filed every last tax form perfectly, it can cause some anxiety.

It’s like when you go through airport security and have nothing of note in your bag but you still get nervous anyway.

What is an IRS audit?

An IRS audit is an investigation where an entity’s (organization or individual) accounts and financial information are examined by the IRS. The purpose of an IRS audit is to ensure the entity is reporting information correctly and according to tax laws.

Law-abiding citizens that are confident in their tax filing abilities should have nothing to worry about, but others might have something to lose some sleep over.

In 2018, of about 990,000 audits that took place, the IRS initiated 2,886 criminal tax investigations. To not become a part of that statistic during the next round of IRS audits, it’s best to be as informed as possible.

Related: Learn more about corporate crime and what business actions can result in you behind bars. 

How do you get selected for an IRS audit?

If you get slapped with an IRS audit, your first thought might be “Why me?” .

A lot of people assume if they are being audited by the IRS that there is a problem. This is not always the case. The IRS has a couple of methods of selecting who to audit:

Computer screening: When you file a tax return, the IRS scans it with a computer program that is designed to find errors. Using a formula, the program comes up with a score for your tax return. This score is what causes the IRS to conduct an audit.

Part of this score is based on the income you report on your tax return compared to the income that your employer reported. If there are any discrepancies, you have a higher chance of being audited. Here are some other actions that would increase your chances of being audited:

auditable expenses

Related examinations: You can also be selected for an audit if a business partner or investor that you have worked with is being audited.

Here are some other audit triggers:

Earning a lot of money
Failing to report taxable income
Making typos or math errors when filing taxes
Being self employed
Experiencing three years of business losses

How do I get notified of an IRS audit?

If you are selected for an audit, you will get a notice by mail. The IRS does not alert auditees by email or telephone.

How is an IRS audit conducted?

The IRS will either conduct the audit through an in-person interview or by mail.

If the audit is happening in person, also known as a field audit, it will either take place at the taxpayer’s home, their place of business, or at an IRS office. If it is happening by mail, which is often referred to as a correspondence audit, the initial notification of the audit will request additional information, which will usually take the form of records of your income and spending. If that additional information becomes too much to mail, you can ask for an in-person interview instead.

Whatever method the IRS goes with for your audit, the main purpose is for them to gain access to the information they need to understand why your tax return was filled out the way it was.

What do I need to provide to the IRS while being audited?

When you are notified of the audit, the IRS will request certain information you will need to provide. Here are some examples of what you might need during an audit:

Receipts Bills Canceled checks Legal documents
Loan agreements Medical records Travel tickets Employment documents

Some of these documents can be accepted electronically. You never know when you are going to be audited, and not producing the requested documents can have some consequences you don’t won’t want to deal with. It’s a pain, but a best practice as a consumer is to keep records of your purchases and income for at least three years from the date you filed the tax return.

What is the timeline of an IRS audit?

The IRS tries to conduct audits as close to the tax filing date as possible. However, because they have to do so many at once, it can take about two years after your taxes have been filed to be audited. Legally, the IRS has the right to go back as far as six years and audit a taxpayer’s return.

The duration of your audit depends on the complexity of the investigation. The timeline is all determined by how long it takes for the IRS to select you for an audit, notify you, schedule an appointment, and review their findings.

Once the IRS gets back to you after an audit, you have a certain amount of time to respond to their results. If your audit is being conducted by mail, you are usually granted an automatic 30-day extension. If they are unable to grant your request for more time, they will contact you.

If an audit is not resolved, the statute of limitations can be extended. If this is the case, the IRS will limit it to three years after a return is due or was filed. If you will be getting a refund, there is also a limitation. If it is extended, you get more time to support their position, request an appeal if you don’t agree with the results, or claim a refund. Not to mention the IRS gets more time to process the results.

If your audit is standard and everything goes as planned, the entire process will typically take anywhere from three to six months.

What are my rights during an IRS audit?

There is a legal aspect to an IRS audit, and knowing your rights is important as you go through the process. During an IRS audit, you have the following rights:

A right to professional and courteous treatment by an IRS employee
A right to privacy and confidentiality
A right to know the reason the IRS is requesting certain information
A right to know how the information will be used
A right to representation
A right to appeal disagreements

What are the end results of an IRS audit?

The IRS can conclude an audit in one of three ways:

  1. After review, nothing changes
  2. After review, you agree with the changes proposed by the IRS
  3. After review, you disagree with the changes proposed by the IRS

If you agree, you go on to sign the appropriate report the auditor used. If you disagree, you can meet with an IRS manager, file an appeal, or undergo the mediation process.

Be on the audit

You’ll find that with IRS audits, the process depends on quite a few factors - why you’re being audited, how much information you need to produce, whether or not you agree with the IRS’s decision. No matter the circumstances, having the right knowledge base before going through it is the best way to survive an IRS audit.

Filing taxes for your business? Check out our resource on small business taxes so you can file properly and avoid an audit. Or, even better, use a tax service provider to ensure compliance!

Find the best Tax Service Providers →

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