What Happens When You Are Audited?
An IRS tax audit is a scary experience. But the IRS is not necessarily accusing anyone of a crime. It often uses computer matching programs that compare financial data with the information on a tax return. Four types of audits are generally performed by the IRS: the correspondence audit, the in-office audit, the field audit and the repetitive audit. The correspondence audit appears most often for personal taxpayers, and the in-office audit often applies to sole proprietorships that net less than $500,000 per year. The field audit and repetitive audit concern larger companies and rarely apply to regular people with average income.
Correspondence audits
The most common type of audit, the correspondence audit ,simply compares IRS computer matching data to what the taxpayer claimed on his or her tax return. Online taxpayers often meet up with this form of tax audit, and they are the least threatening of all four. These tax audits generally have a 30-day response time. Rather than worrying, a taxpayer should consult a tax professional and send in the requested information. Often copies of cancelled checks or receipts mollify IRS agents who want to verify deductions that were claimed on the return.
When and what to worry about
Even if there are inconsistencies, correspondence audits by the IRS are rarely a cause for concern. Just send in the documentation needed. Chances are that you were honest enough in your filing. They are not "out to get you." However, if truly worried, you should voice your concerns to your tax attorney or accountant. Tax professionals know the in's and out's of audits and can allay some of the fears associated with audits. The worst possible thing to do is to avoid the situation entirely. In fact, timely response to an IRS audit indicates that you are not hiding anything. It also provides you and the IRS agent enough time to look over the files.
In-office audits
An in-office audit often involves a small business and is performed at the IRS office. The in-office audit is often limited in scope to a few items on the tax return of a sole proprietorship, often one that makes less than half a million per year. Rather than panicking, consult a tax professional, accumulate the supporting documentation, and offer only the documents that the IRS requires. Act organized and prompt, answering questions honestly but without any extra details. Never leave the last or only copy of a document with an IRS agent, and obtain copies of any document that you sign. Avoid casual conversation that gives the agent unnecessary information about you; however, remain calm and polite. Do not anger an auditor into looking for problems where there are not any. If you get angry, the tax auditor might think you are hiding something.
More complicated types of audits
Field audits are the most complete form of audits. Often these are accomplished by a revenue officer who is experienced at disputing claimed deductions. The IRS uses this type of audit when it believes that an on-site review of the books and records of the taxpayer is warranted. In a field audit, the IRS agent can enter the work site and investigate just about anything related to financial records or tax situations. Always consult your own tax professional for this type of audit. Tax professionals like certified public accountants and tax attorneys know how to protect you, how to accommodate the IRS agent, and how to keep you from saying or doing too much or too little. Repetitive audits are rarely seen by the average taxpayer or small businessperson unless they have a reputation for dishonesty in their taxes. Generally, the IRS repeatedly audits large corporations with repetitive audits. These large businesses know to hire tax attorneys to deal with these audits on a regular basis.
Dealing with the IRS is not as difficult as most people believe. Do not avoid the issue until the last moment, when you end up looking disorganized and feeling helpless. Gather the materials needed right away. Whenever you have a cause for concern, consult a tax professional. They are the ones who cover this ground every day.