Most people are terrified at the mere thought of an IRS Audit, and however the lion is not so fierce as he is painted, tax audits can be bad and can result in a significant tax bill, especially now, after the 2018 tax bill.
What is an IRS Audit?
There are different kinds of audits, some extensive and most are minor ones, but they all follow a set of rules. Your chances of being audited are slim if you take in account that less than 1% of returns are audited every year, but you still need to ensure your taxes are done accurately the first time. When you know what to expect and you followed the best practices you have almost nothing to fear about.
There are three types of audits: mail, office and field audits, and underreporter inquiry. Mail audits are routine, just a request for information from the IRS.
Office and field audits take place when the IRS wants to know whether your tax return is accurate. They will ask you to validate your deductions and credits and they will take a look at your business activity, your income, and even your lifestyle.
The underreporter inquiry (also known as CP2000) is a discrepancy notice that proposes a specific increase in taxes on your return, usually when there is a mismatch between the income you reported on your return and information that your employer or other payer provided to the IRS.
Because office and field (also called in-person) audits are generally more complex, looking for a tax advisor help is a must.
How to avoid an IRS Audit?
If you take care of what you do and follow best practices there is a big chance you won’t have to face an IRS audit in your lifetime. To avoid being picked by the IRS for an audit, please take this points in mind:
- Double-check your Social Security numbers
- Double-check your math
- Have proof for all deductions
- Leave nothing blank (use a dash or a zero if you aren’t putting a number in a line)
- Make sure all your numbers match (especially between forms and your tax return)
- If you’re in a cash business, be extra meticulous
- Check the mail for all W-2s (especially side jobs!)
- Don’t make stuff up!
- Avoid filing amendments
Some examples of Documents You May Need During an IRS Audit
- Receipts and bills
- Employment documents
- Canceled checks
- Legal papers
- Theft or loss documents
- Travel-related paperwork
- Loan agreements
- Mileage, business or expense logs
- Travel-related paperwork
- Medical bills
- Investment statements
Some Things You Should do to Get the Best Results in an IRS Audit
Yes, it is very unpleasant, but once it gets to you, it won’t go away. So what to do during an IRS audit:
Know your rights as a Taxpayer: a clear explanation of why the IRS is requesting that specific information from you; to be treated politely and professionally; appeal any decision in a “fair and impartial” independent forum; have an authorized representative of your choice to represent you during the whole process.
Make your responses complete and on time: take into account that the person reading your response will rely on the quality and completeness of your response to interpret your position.
Prepare as if the IRS was auditing multiple years and your lifestyle: they will check if there is any unreported income, so you better have an explanation for every deposit into your accounts and for major expenses.
Consider hiring a Tax expert immediately: tax professionals trained in IRS audits usually have the resources and experience to clearly communicate your tax position.
Assert your appeal rights when needed: the auditor decision is not final. You can appeal to his/her manager, and then to the IRS Office of Appeals.