You may be wondering about the implication of being notified that your taxes are being audited. A tax audit is simply an accounting process where the IRS reviews your business or individual financial records to ascertain that you have filed your tax return correctly. If you demonstrate that your original tax return was accurate and complete, you will not be asked anything more. But in the event that the IRS detects mistakes and deliberate misreporting, you will be required to pay the corrected tax return amount plus interest and penalties.
Helpful steps you can take in the event you receive an audit notification from the IRS.
Inquire why your tax return was chosen for an audit
There are various reason why your taxes may be audited, including:
- Certain activities on the return for example cash wages, W-2 and 1099 forms that do not correspond with your reported figures, huge deductions in relation to your income, reports that differ with previous years and so on.
- Associated examinations, where your tax report includes transactions with another person who is being audited.
- Automatic flags, which involves computer software finding outlying scores on your return, for instance above-average withholding.
- Being selected randomly
Letters and notices from the IRS come with a notice number that is located on the upper right-hand corner. The numbers provide additional information concerning the particular issues with your return. When you learn the reason for the audit, you can concentrate on the relevant items and start collecting the required documents.
Establish how you are being audited
There are various types of tax audits, and each one of them comes with specific requirements. Understanding how you are being audited will help you figure out the documents you require, where they will be sent and whether there is a need to look for a tax lawyer or a CPA.
Here the IRS center requests for additional information regarding a section of your tax return. They are mostly looking for receipts, checks and related information.
In this case the IRS Service center requests you to go to the local IRS office carrying specified documents. This is where the audit is conducted.
Here an IRS agent shows up at your business premises to perform the audit personally.
Taxpayer Compliance Measurement Program Audit (TCMP)
This is the most comprehensive audit, and it involves using documents to substantiate all aspects of your return, including marriage and birth certificates. The main objective of this audit is to update all the data that is used in the computer scoring program.
For both TCMP and field audits, it is highly advisable to have your lawyer/CPA present as the audit is going on.
Collect your documents
The moment you learn what is expected of you, it is time to go through your records in order to retrieve the required documents and receipts. You must never send original copies or your only copies and never submit more documents than what you are asked for. In case you are unable to find the requisite documentation, request to send duplicates because the auditors will not allow the excuse that documents are missing or lost.
When you get all the originals and copies, organize them properly, particularly if you are facing a personal audit. Proper organization indicates to the agent that you are a responsible taxpayer and this may lead to the agent reducing the scope of the investigation.
Extra tip: During the audit, make sure you only answer the questions that you are asked. Give short answers and always respond truthfully and briefly. If you are not sure about how to answer a particular question, write it down and propose to get back to the IRS agent with the required answers. Every comment that you make reveals more information about you. However, ensure you stay calm and keep cool. Always avoid being stubborn, aggressive or argumentative.