Nobody wants to go through an audit, but everyone wants to know what to expect. What many people are unaware of, though, is that there are different ways the IRS will audit you. Your expectations will be dependent on the type of audit. Each type of audit has varying means of correspondence between the taxpayer and IRS, has different levels of participation for the taxpayer, and requires different documents from the taxpayer. To figure out what you should expect during an audit, you must first determine what type of audit you’re experiencing.
All audits begin with a letter that states what parts of your tax return are in question. It additionally specifies when, where, and how you are to respond to the IRS. The taxpayer will also receive an Information Document Request (IDR) that specifies which documents must be gathered by the taxpayer.
Correspondence audits are the most common type of audit, making up approximately 70% of all audits, and are done entirely through mail. These audits are fairly simple and do not require in-person meetings or extensive investigation. Correspondence audits are primarily for verification issues on a tax return such as justifying income or deductions.
The IRS uses computer systems to examine your tax return and to detect mathematical errors, missing documents, or inconsistencies. The IRS compares the information on your return to information already on record provided by third parties such as banks and employers. Items typically requested by the IRS for verification purposes usually include W-2’s, 1099 income items, itemized deductions, and Schedule C receipts.
If the information from the return conflicts with what is on record or the return is missing significant documents, then the taxpayer will be sent a Letter 566 or a CP 2000.
Letter 566 informs the taxpayer that their return has been selected for audit and will list required documents to be sent back to the IRS. This letter is mostly sent out to substantiate specific claims on a tax return such as itemized deductions as opposed to a broad examination.
A CP 2000 is not a bill, but it can result in an increase, decrease, or no change in your taxes. The CP 2000 is a notification of the mismatched information and a request for additional information. Taxpayers are given 30 days from the date of the CP 2000 (not the day you received it) to respond to the IRS or they will face added penalties.
Although the correspondence audit is the most simplistic type of audit, it is not unusual for a taxpayer to consult an attorney for assistance. The IRS tends to request more than they’re entitled to, so proper representation will be helpful in protecting the taxpayer.
Not nearly as common as correspondence audits, office audits are more comprehensive looks at an individual’s financial history. These are conducted through interviews with an auditor in person at the local IRS office.
A letter is sent to the taxpayer that lists specific items on their tax return that are in question. The IRS requests that you bring in substantiation or any documents that can justify the questionable items in to the IRS office.
Office audits are far more troublesome for the taxpayer in that during the interview the IRS examiner may pursue information, such as financial and employment history, in an attempt to find issues outside the specifics of the audit. IRS agents are trained to scrutinize every word you say and every substantiation you claim. Depending on how you respond, you could potentially expand the scope of the audit to issues and tax returns from other years. This can result in what should have been avoidable fines or even criminal charges for the taxpayer.
It is highly recommended to bring an experienced tax attorney to the interview. Proper representation can protect the taxpayer from the IRS overstepping their bounds and can prevent further investigation.
Field audits are the most thorough investigations conducted by the IRS with the purpose of uncovering major violations. These audits are done by highly trained revenue agents who review the entirety of an individual’s or firm’s financial/tax history. It is the agent’s goal to uncover issues with the taxpayer’s reported income and deductions.
They’re called field audits because the revenue agent will interview the taxpayer in their own home or place of business. Most businesses are audited this way so the agent can review all records related to the return and to interview the owners. If you hire professional representation, however, the first meeting will more than likely take place in your attorney’s office.
The agent will examine a tax return to discover any flaws or inconsistencies such as unreported income or improper deductions. After examining one year’s return, the agent can open other years’ tax returns if issues are found. The agent is not limited to tax returns but may also examine records such as credit databases and property records.
The investigation will go as far where the agent will examine the taxpayer’s general expenditures. If the agent finds that the expenditures surpass the reported income, the agent will assume there is unreported income and the burden lies with the taxpayer to prove otherwise.
It is crucial to contact an attorney or accountant as soon as a field audit has begun. Similar to the office audit, the agent will take advantage of the taxpayer’s lack of knowledge and will attempt to probe damaging information out of them. Any information you give to the agent can be used against you, no matter how innocent it may seem. This can result in substantial penalties and even a criminal investigation regardless of intent. By using IRS Form 2848, you authorize power of attorney which grants an experiences representative the power to settle tax matters on your part. Here at the Law Offices of Jef Henninger, Esq., we have the means and experience to shield you from the potential dangers of a field audit.