19 Jun What Happens During an IRS Audit?
Being selected for an IRS audit is a thought terrifying enough to make some people break out into a cold sweat. But it may not be as bad as you believe. Of course, nobody wants to be audited, but in most cases, the process is fast and simple—especially with IRS audit assistance in Provo. Here’s what you need to know about the IRS audit process.
Most people ask themselves this question when they first get that audit notice in the mail. “Why me? Why was I selected to be audited?” In most cases, your return likely set off one or two alarm bells in the IRS’s automated tax return processing system. This system is set up to flag returns that meet certain criteria. Here are some of the things that might get your return flagged:
- Very large deductions in relation to reported income (e.g., claiming $40,000 in deductions, when you only reported $42,000 of gross income)
- Claiming certain, commonly-abused deductions (e.g., home office deductions and business vehicle deductions)
- Showing recurring losses for a business across consecutive tax years
- Deducting business expenses that don’t match your line of business (e.g., a family doctor deducting construction equipment)
When the IRS’s algorithm finds items like these on a return, the return is flagged and reviewed by a person, and your odds of being audited will increase. Note that, if you genuinely qualify for these deductions, you should not avoid claiming them simply to reduce your odds of being selected for an audit. The important thing is that the information you provide to the IRS is accurate.
Now that you understand what may have led to you being selected for an IRS audit, it’s time to address what will happen next. First, you need to understand that there are two types of IRS audits: in-person audits, and correspondence audits. Here’s a breakdown of each.
This is the more complex and more strenuous type of audit to undergo, and you definitely want to have a CPA on your side for this type of audit. With an in-person audit, an IRS representative will meet with you to review your records. They’ll be looking at three types of information:
- Income – The IRS agent will ask to review your financial records for any and all income you receive. This may include bank statements, tax refunds, pensions, alimony, asset sales, and prizes or winnings, to name a few.
- Tax returns – They will also want to see copies of your tax returns for the past three years, so be sure you have those handy.
- Penalties – The agent will also likely ask you about past tax penalties you’ve received, and they will decide if penalties need to be imposed based on the findings of the current audit.
This type of audit is much simpler, and is the much more common type of audit that people receive. With this type of audit, you’ll receive a notice from the IRS requesting additional information or documents to support a certain deduction or other item on your return. All you have to do is send in the supporting documentation. Once you send in the documents, one of three things will happen:
- They will decide your documents support what was written on your return, and nothing changes.
- They will decide you owe more in taxes, and suggest a change to your return. You can choose to agree to the change, in which case you will sign a document that states this and make the additional payment. If you disagree, you can challenge the IRS’s assessment, and a conference will be scheduled with an IRS manager for additional review.
- They will decide you paid too much, and you’ll get a refund.
Note that, in both types of audits, the burden of proof lies with you. You must be able to provide proper documentation to support any deductions you claim or numbers you report on your return. If you cannot provide necessary documentation to support, say, a certain deduction, the IRS will remove that deduction from your return. This is why it is vital to keep detailed documentation for everything reported or claimed on your tax returns.
Can I Get Help?
We realize that an audit can be stressful and overwhelming—especially an in-person audit. But, luckily, you can have help on your side. If you worked with one of our CPAs, we automatically offer you IRS audit assistance in Provo, and can help you through the process, whether it’s an in-person or correspondence audit. Contact us to learn more.