An audit from the IRS is certainly no picnic. But it doesn’t have to be the nightmare many people believe it to be. In fact, an IRS audit can literally take a matter of minutes, depending on the exact circumstances connected to your audit. So, if you’ve received a notice that you’re being audited, take a deep breath. Then, keep reading to find out what you need to know about IRS audits. And, if you need IRS audit representation in Provo, contact us.
How Were You Selected?
First, it’s important to understand why you’ve been selected for an audit. In all likelihood, your return was flagged by the IRS’s automated system. This system uses an algorithm that checks returns for certain “red flag” items. Here are a few examples of what this algorithm looks for:
- Certain deductions that taxpayers commonly abused (e.g., business vehicles or home office deductions)
- Recurring business losses for several years
- Large deductions in relation to your income (e.g., claiming $30,000 in deductions, and only reporting $35,000 of gross income)
- Business expenses that don’t coincide with your industry (e.g., a CPA deducting medical equipment expenses)
When the IRS’s system finds these types of items, it will flag your return for further review and, possibly, an audit. Of course, it is entirely possible that you included these items on your return and the information was perfectly accurate. If this is the case, don’t avoid including such deductions and items on your return simply to reduce the likelihood of an audit; simply report accurate information to the IRS and, even if you are selected for an audit, it should go over quite smoothly.
So What Happens Next?
So, now that you know why you might have been chosen for an audit, let’s talk about the next steps in the process. This will depend on which type of audit you’re chosen for: an in-person audit, or a correspondence audit.
A correspondence audit is the most common type of IRS audit, especially for individuals. With this type of an audit, you’ll receive a notice in the mail requesting supporting documents for a certain item on your return. This may be a deduction you claimed, or the amount of income you reported. All you have to do is submit the requested documents.
Once this is finished, there are three things that can happen:
- The IRS is satisfied with your documentation, and nothing on your return changes.
- The IRS determines that you overpaid on your taxes, and you’ll receive a refund.
- The IRS determines you owe more in taxes and will recommend a change to your return. If this happens, you can choose to agree or disagree with the change. If you agree, you’ll sign a document stating so and will submit your additional payment. If you disagree, you can challenge their decision, and a conference will be scheduled with an IRS manager.
If the IRS determines you owe more, and you choose to challenge the IRS’s assessment, it’s important that you have IRS audit representation for your scheduled conference. One of our CPAs will be able to advise you further on the matter, so contact us directly if you are in this situation.
In-person audits are much more complex, and we strongly recommend that you have representation from a CPA if you’re receiving this type of audit. With an in-person audit, an IRS agent will meet with you to review records and documentation. There are three main types of information that they’ll be looking for:
- Penalties – The agent will likely ask you about any tax penalties you received in past years, and will decide if they need to impose any penalties in association with your current audit.
- Income – They will want to see all available documentation for any source of income you have, including state and federal tax refunds, bank statements, paystubs, pensions, alimony, sale of assets, gambling winnings, and so on.
- Past returns – You should also ensure you have your tax returns for the past three years on hand, as the IRS agent will want to look at these as well.
In both types of audits, you should know that the burden of proof lies on you. This means that you must be able to support anything you reported or claimed on your tax return with physical documentation. If you’re unable to do this, the IRS may remove the unsupported deduction or alter your tax return to match what documentation you are able to provide. This is why it is essential to keep detailed documentation to support your tax return.
Can You Have Representation?
In an IRS audit, you are entitled to have a CPA assisting you and representing you throughout the audit. Even if you’re only undergoing a correspondence audit, having IRS audit representation in Provo makes the process much easier and less stressful. Contact us to learn more about how we can help you through an IRS audit.