A tax audit is when the IRS (or other taxing authority such as a state, city or county government) examines you or your business’s accounts and financial information to ensure your taxes have been reported correctly. An audit examination will consider current tax laws, verify your income and deductions, and verify the reported amount of tax has been calculated correctly.
Generally, a taxing authority will notify you that you have been selected for an audit by letter. If you do receive this dreaded audit letter, do not ignore it! Many audit procedures are subject to strict procedural deadlines. Stay calm and understand that an audit is a professional procedure that can often be resolved by simply presenting the correct paperwork.
Simply knowing what to expect can be immensely helpful when dealing with a tax audit. Having an attorney or representative with you during the process can allow you to promptly address the errors or issues, resolve numerical discrepancies, communicate respectfully with your tax examiner, and complete the process with a reduced level of stress and time.
Does an Audit Mean I’m in Trouble?
An audit in no way implies suspicion of criminal activity. Tax returns are often complicated documents that reflect a lot of financial data that must be evaluated to confirm accuracy.
The IRS uses several different methods to select a tax return for audit:
- Random selection and computer screening. Sometimes returns are selected based solely on a statistical formula. The IRS computers analyze your tax return against “norms” for similar returns.
- Related examinations. The IRS or other taxing authority may select your return when it involves issues or transactions with other taxpayers, such as business partners or investors, whose returns were also selected for audit.
- Red flags/triggers. Some returns are chosen based on “red flags”, such as discrepancies in reported income or unusual deductions or credits.
What Happens During an Audit?
Most audits are nothing serious, and more than three-quarters of IRS audits are actually completed through the mail.
Tax audits requiring a more substantial review of financial records or other factual issues are generally conducted through in-person interviews.
An “Office Examination Audit” occurs at a local IRS branch, and a “Field Audit” is a more extensive process where your federal audit examiner will visit your home, business or accountant/attorney’s office to examine records and files.
Whether via mail or in-person interview, you will often have to submit certain books and records as requested by the IRS. When doing so, it can also be helpful to provide explanatory statements to explain your method or thought process behind your original return (which can help reduce the risk of hefty tax penalties if you can show your decisions were made reasonably and in good faith).
The IRS and most state taxing authorities have a “taxpayer bill of rights” that will apply to you during a tax audit. For the IRS, these rights include:
- The right to professional and courteous treatment by IRS employees.
- The right to privacy and confidentiality about tax matters.
- The right to know why the IRS is asking for information, how the IRS will use it, and what will happen if the requested information is not provided.
- The right to be represented by a CPA or attorney.
- The right to appeal disagreements, both within the IRS and before the courts.
At the Law Offices of Daniel T. Goodwin, our tax resolution team has handled a wide range of cases and issues involving both IRS and state audits. We can also provide a preliminary consultation to review your audit letter or other examiner correspondence to advise you of how to handle the audit on your own. Do not hesitate to contact us if you have a question about a tax audit or need formal representation during a tax audit.