Tax Debt Relief

IRS Tax Auditing: What Exactly Does It Involve?

Written by fritzie

The IRS now conducts the fewest number of audits since 2002. During the 2017 tax year, only one in 160 returns received an audit notice. The year was a significant drop from 2010, which was the IRS’s busiest year as it audited one in 90 returns.

Just because you’re less likely to receive an audit this year than in the last decade doesn’t mean it can’t happen. Higher-income households, in particular, are more likely to receive an audit notice.

Are you concerned about IRS tax auditing? Tax audits are often demonized, but they follow a fairly straightforward process. Keep reading to learn what happens if you get an audit notice from the IRS.

What is an IRS Tax Audit?

A tax audit isn’t a trap. It is a close examination of your tax return.

If the IRS chooses to audit you, it will carefully look at the details provided on your tax return to make sure they are accurate. While the audit looks out for any mistakes, the process focuses on your income and deductions.

The auditor wants to make sure that you reported all your income and that your deductions are valid.

Unreported income is another word for tax evasion. Willfully attempting to evade tax on your income is a felony in the United States. Moreover, it’s incredibly expensive for the government. The IRS says that unreported taxes cost the government $458 billion every year.

How Will the IRS Notify Me?

If the IRS initiates an audit, the agency will always contact you by mail to inform you of its intentions. The IRS will never telephone or email you about your tax returns, audits, or refunds.

If you receive an email or a phone call from a party claiming to be the IRS, report the email address or phone number to the IRS email: [email protected]

Click here for more information on reporting phishing and other IRS scams.

Why Did the IRS Choose Me?

Some audits occur because the IRS flags a problem with your tax return.

Not all audits are personal. The IRS uses a statistical formula to audit random accounts. If your account gets picked up by the computer screening, then the IRS compares your return against the accepted “norms” for returns of your type based on the norms determined by the National Research Program.

In some cases, the IRS chooses your tax return when it relates to another tax return chosen for audit. For example, if your business partner received an audit, the IRS might look at yours, too.

How Will My Audit Take Place?

The IRS manages most audits through the mail. If you use the mail method, the IRS sends over all the instructions required to complete it including what additional information they need.

Some audits take place in person with an interview. An IRS officer will come to your home, office, or your accountant’s office for a personal interview.

Four Steps Involved in IRS Tax Auditing

Did you receive a tax audit notification by mail? Don’t panic. Although IRS auditors are notoriously ruthless, you generally have nothing to worry about if you prepared your taxes correctly.

Here are the four steps involved in IRS tax auditing:

1. Respond to the IRS Audit Notification

The initial notification will include instructions for a response. You, or your accountant, must respond according to these instructions.

When you respond, you’ll need to provide the documents explicitly requested by the IRS. Be sure to mail copies of the papers – never the originals. Some of the common records required include:

  • Bills
  • Receipts
  • Canceled checks
  • Loan agreements
  • Legal papers
  • Employment documents
  • Tickets
  • Logs or diaries
  • Medical records
  • Schedule K-1

The IRS might also ask you to fill out a Schedule C questionnaire. These forms look at your expenses and feature detailed instructions to help you complete them.

When the IRS audits your taxes, the auditor may request all documents related to the last three years of taxes. It may go back as far as six years if it sees a serious error.

In most cases, the IRS tries to limit itself to auditing tax returns filed in the present year. It also does not initiate an audit under the assumption that it needs to go back as far as six years.

You should have all the financial documents you listed on your tax return for the last three years. The IRS requests that all taxpayers hold on to these documents in case of an audit.

If you need more time to gather the documents, you can fax a written request to the IRS. In most circumstances, the IRS will grant you a one-time 30-day extension automatically.

2. Know Your Rights

A tax audit is an excellent time to read up on your taxpayer rights. As a taxpayer in the United States, you have a right to:

  • Courteous treatment by the IRS and your auditor
  • Privacy and confidentiality
  • Know why the IRS wants your information and how it will be used
  • Representation
  • Appeal disagreements

The IRS cannot stop you or discourage you from working with an accountant or lawyer when you get audited.

3. Wait

Once you provide all the requested documents, you go through a waiting period.

Your wait may change according to:

  • the type of audit,
  • the complexity of your return,
  • the information you provide, and
  • whether you agree with the IRS conclusion

Your wait time also depends on other projects. Auditors divide their time between multiple projects.

Remember that you’ll need to wait for the auditor to plan the audit, complete the fieldwork, and then write the audit report.

4. Conclude the Audit

The review concludes with one of three resolutions:

  • No change
  • Agreed
  • Disagreed

The IRS assigns “no change” to returns where it was able to account for all times.

“Agree” occurs when the IRS proposes changes that you accept. The “disagree” conclusion happens when you disagree with the changes. If you disagree, you can challenge the audit findings.

Good Representation is Key

When the IRS comes knocking, don’t panic. Providing the auditor with the correct documents as quickly as possible will get them off your back sooner rather than later.

Working with a tax professional during an audit helps you navigate the process. Tax accountants know what to provide and when to encourage your auditor to resolve the case quickly. They also offer advice when the IRS offers a conclusion and help you make your case.

Looking for more tax audit resources? Check out our post on the top IRS tax auditing myths.

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