Don’t Be Afraid; Be Prepared: what to Expect During a Tax Audit
You can breathe a sigh of relief knowing that as a taxpayer, you’re half as likely to be audited by the IRS than you were a decade ago. In 2019, the IRS audited about .45% of individual returns.
This makes it highly unlikely that you’ll ever have to experience an IRS audit. However, if you find yourself in the unfortunate position of a tax audit, it helps to know what to expect.
This guide will help you understand what happens when the IRS performs an audit.
Why You May Get Audited
The first step is understanding why you may be the subject of an IRS investigation. There are several reasons that vary from randomly chosen, to someone you do business with was audited, or any one of these reasons:
- Business use of a vehicle
- Home office deductions on your tax returns
- Conflicting third party income tax reports about income
- Hobby related deductions
- Foreign currency transactions or bank accounts
Three Types of Audits
There are three types of audits, with the vast majority getting performed through the mail. The first is a correspondence audit. These occur as a result of a routine error, such as incorrect math or missing documents.
The second type is an office examination. The local IRS branch will dispatch someone to determine if your report income and deductions are accurate.
The third type of audit is a field audit. This is the most extensive and will require an IRS agent to visit your home, business, and accountant’s office. They will examine your records and determine if your returns are correct.
When the IRS contacts you, it will either be by phone or mail. It will never be through email. Your notice of the audit will include a deadline to respond; typically, it’s 30 days.
Do not wait to respond to this notice. You don’t want to miss the deadline and make the situation worse for yourself. The longer you wait, the more the interest builds on the amount you potentially owe the IRS.
You may also need time to gather all of the necessary documents. Make copies of the originals so that you can submit the copies. If you find that you’re missing documents, you’ll need time to request duplicates.
When to Hire an Attorney
If you’re unsure of what the IRS takes issue with or what they’re asking for, then you need to speak with a professional. You can reach out to a CPA, the service that prepared your taxes, or a tax lawyer. They will be able to explain the audit documents and what’s required of you.
Smoothly Navigate Your Tax Audit
As you can see, a tax audit doesn’t have to be a scary thing. For most people, it’s a simple clerical practice that clears up any missing documentation or mistakes in the math. If you find yourself in a more serious audit, it can help to seek out the advice and guidance of an attorney or financial professional.
Check out our other money articles and learn how to make smart financial decisions to have a sound future.
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