What documents will the IRS want to see?

Don’t wait until the IRS audits your return to start collecting and organizing your financial records. Keeping track of documents such as receipts and payroll reports can mean the difference between sufficiently substantiating your claims and having to pay hefty fines.

The IRS is going to request different documents for different situations. For example, if you’re running a small business and you deduct your travel expenses claiming they’re business-related, the IRS is going to want to see a mileage log and receipts for gas and lodging. You will also have to provide some proof that the travel was business-related. If you vacation in Cancun and write it off as a business expense, that’s called fraud. If you have the documents to show that your trip was to meet with a client, however, this would be a legitimate deduction.

The Information Document Request

For any taxpayer unlucky enough to be audited, it will be impossible for them to know what documents the IRS wants to see until they receive an Information Document Request (IDR) in the mail. The IDR, also known as IRS Form 4565, usually arrives with an audit appointment letter that details what steps need to be taken.

The IDR itself is a list of specific documents the taxpayer must gather in order to substantiate questionable items on their tax return. The number of IDRs sent to the taxpayer depends on the type of audit and its complexity. Sometimes, the IRS only needs to verify one item and can settle the audit after one IDR. In more complex cases, you may have to gather a variety of documents from an initial IDR, meet with the IRS in person, then receive more IDRs to support what was discussed at the meeting.

The Information Document Request will list out all specific documents you must deliver to the IRS for examination. The documents vary on a case-to-case basis, but frequently requested items include:

  • General ledger
  • Copies of  loans, leases and material contracts
  • Cash disbursements journal
  • Accounts payable ledger
  • Trial balance
  • Financial statements
  • IRS Forms 940, 941 or 944, 945
  • Forms W-2
  • IRS Form 1099
  • Collective bargaining contracts with employees
  • Loan statements
  • Bank statements
  • Cancelled checks
  • Receipts
  • Listing and invoices for fixed asset purchases
  • Payroll reports

Once you finish reading your IDR, you should begin gathering the requested documents as soon as possible. Be sure to make copies and to never send in the original copy. If you can’t find a specific document, get in contact with whoever originally issued the document immediately and request a duplicate. The IRS doesn’t accept missing documents as an excuse. Do not ever send the IRS more information than they asked for, this will only come back to haunt you if the IRS finds another mistake.

If you are being audited, you don’t have to go at it alone. The Law Offices of Jef Henninger work aggressively to assure our clients the best possible outcome from their audits.

When does an audit end?

No matter how long they take or how stressful they can be, all audits eventually come to an end.

After the IRS has finished collecting all necessary documents, reviewing your return, discovering any mistakes, and interviewing the taxpayer, the auditor will conclude the audit by either proposing changes to your tax return or by making no changes. The auditor may find that the substantiation you provided has resolved any errors in the tax return, leading to no changes and no penalties. You will receive an IRS Form 4549 in the mail that details the adjustments to the return.

Most people are unaware that if you are not happy with the audit results, you are given the opportunity to appeal. Taxpayers are given the choice to agree or disagree with the IRS’s proposed changes.

If you agree with the changes

When the examination concludes, you will receive a letter describing what parts of your return have been changed and how much additional tax  and interest you owe. Interest is calculated from the date your return was filed. Failure to pay both the tax and interest will result in a bill. The IRS does offer payment plans that vary from person to person.

In some cases you may not be responsible for additional tax but may be entitled to a refund plus interest.

Once you understand the results of the audit, you must sign a copy of the report alongside IRS Form 870 which signifies that you consent to the IRS’s adjustments. After you do this, the audit is finally over.

If you do not agree with the changes

If you find that you disagree with the auditor’s conclusion, you have the right to appeal and the right to meet with the auditor’s supervisor. You alongside your attorney can work to reach an agreement with the supervisor. You may bring in or mail additional documents you think may further substantiate you.

If you do not come to an agreement with the supervisor, you will receive a 30-day letter informing you of you right to appeal the changes. Obviously, you have 30 days to respond to the IRS, either accepting the changes or proceeding with an appeal. If you do not respond to the letter, the IRS adjustments will become final.

How long can the IRS audit me for?

Fortunately for taxpayers, audits don’t last forever and the IRS cannot audit a tax return from any year they want.

In most circumstances, the IRS generally audits tax returns within the past 2 years. The Internal Revenue Code, however, provides a statute of limitations that allows the IRS to audit any return within the past 3 years. For example, if you received a notice of audit in 2016, the IRS can audit a return filed in 2013, 2014, and 2015.

There are a few situations in which the IRS can audit tax returns older than 3 years.

Omission of Income

If the IRS finds that a significant amount of gross income, 25% or more to be exact, is missing from a return, then the statute of limitations is extended. The IRS will then have 6 years to audit that return.

Return Not Filed

If you do not file a tax return for a given year, the IRS does not have a time limit to audit or tax you for that year.

Fraudulent Return

If the IRS finds evidence of fraud or intent to evade taxation within a tax return, they do not have a time limit to audit or tax you for that year.

The Taxpayer Agrees to Extend Statute of Limitations

If an audit is not resolved in time, you may be asked to extend the statute of limitations in order for the IRS to assess additional tax. Agreeing to extend the statute will allow you more time to gather more documentation to substantiate your claim, appeal if you do not agree with the audit results, or to claim a tax refund. You should think carefully before you agree, however. Extending the statute of limitations also gives the IRS more time to complete the audit and find something potentially damaging to you

You can extend the statute of limitations by filling out an IRS Form 872 which extends the audit to a specific date or a Form 872-A that extends the audit indefinitely (this can be revoked by submitting a Form 872-T).

The amount of time each audit takes varies and is dependent on the complexity of the case, the availability of documents, scheduling, and whether or not the taxpayer decides to appeal. Auditors are advised to complete audits within 28 months of the date you filed your tax return or the date it was due, whichever was later. The IRS is legally allowed 36 months from the date filed to close an audit, but the additional 8 months are to spare time for the appeals process.

What to Expect when Interviewed by the IRS

Most Americans subject to audit are lucky enough to complete the process entirely through mail. Those who are not as fortunate must meet face-to-face with an IRS agent to discuss the issues of their tax return.

As if an audit itself isn’t scary enough, most people are even more anxious about the in-person interview. IRS agents are trained to scrutinize your financial history, to pick out any flaws with your tax return, and to get you to say something that may incriminate you further. This absolutely justifies taxpayers’ apprehensions.

The best way to ease the anxiety is to prepare for the appointment. It is crucial to prepare/review documents requested in the initial letter, get representation, and to understand what will happen during the interview.

The IRS will choose the location of the appointment, however they will contact you through phone or mail to determine a convenient date and time. You can request a change of location, however it may not be granted.

Where the appoint will take place depends on whether the audit is an office audit or a field audit. The meeting for an office audit takes place in the office of the local IRS branch. Field audits can take place at either your home, your attorney’s/accountant’s office, or your place of business.

Meetings not related to business may take place at your home but will almost definitely take place in your attorney’s/accountant’s office if you have one. The agent will typically discuss issues with itemized deductions, unreported income, or investments on your tax return. They will examine any substantiation you bring and will determine whether you owe money, are owed money, or there is no change to your return.

Meetings relating to business take place at your place of business where books and records are held. The IRS agent is required to take a tour of and review your business facilities. They will want to examine how you operate your business and look at any major equipment you own. The agent will also question you on wheather transactions are made by cash, check, or credit card.

For both business and nonbusiness audit meetings, the agent will begin by previewing your rights and by summarizing what parts of your return/finances are being examined. The agent will then proceed with specific questions.

It is vital to note that if you have representation, you are not required to attend this meeting and it is better if you don’t. By filling out IRS Form 2848, you grant power of attorney to your representative, allowing them to attend the meeting and negotiate with the IRS. This is highly recommended in that it allows an experienced professional knowledgeable in tax law to take control of your audit. This removes not only the possibility of incriminating yourself during the meeting but also removes the anxiety of meeting with the IRS.

If you choose not to proceed with representation, the face-to-face interview will be challenging.

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. 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.

It is highly recommended that you do not proceed into an audit alone. The Law Offices of Jef Henninger, Esq. are here to negotiate with the IRS and produce the best outcome for our clients.