Do you feel a sense of dread whenever you hear the words “IRS Auditing”? Fear not! In this lesson, we will cover everything you need to know about IRS Auditing.
What is IRS Auditing?
The IRS (Internal Revenue Service) audits taxpayers to verify that they are reporting their income and expenses accurately and paying the correct amount of taxes. Auditing is the process of reviewing and examining a taxpayer’s financial records to ensure compliance with tax laws.
How does the IRS Select Taxpayers for Auditing?
The IRS uses several methods to select taxpayers for auditing, including:
- Random Selection:Random Selection: The IRS picks some returns for audit purely at random — spotless books can still be reviewed. The IRS sometimes selects taxpayers at random for auditing.
- Matching Programs:Matching Programs: The IRS computer comparing income reported by others (1099s, W-2s) against your return — mismatches trigger audits. The IRS uses computer programs to compare a taxpayer’s tax return with information reported by employers, financial institutions, and other third parties. If the information does not match up, the taxpayer may be audited.
- Related Examinations:Related Examinations: Audits triggered by connection to another audited return — a partner, investor, or matching transaction. The IRS may audit a taxpayer who is involved in a business that is already being audited.
- High Income:High Income: Higher-reported incomes face higher audit rates — the IRS targets returns where errors cost more. The IRS may audit taxpayers with high incomes because they may have more complex tax returns and may be more likely to underreport their income or take improper deductions.
What Happens During an IRS Audit?
During an IRS audit, an auditor will review your financial records, including your tax return and any supporting documents. The auditor will look for errors or discrepancies and may ask you to provide additional information or documentation to support your tax return.
Types of IRS Audits
There are three types of IRS audits:
- Correspondence Audits:Correspondence Audits: The simplest IRS audit — conducted by mail, usually about one specific item. Correspondence audits are the most common type of audit and are conducted via mail. The IRS will send you a letter asking for more information about specific items on your tax return.
- Office Audits:Office Audits: The IRS asks you to bring your records to a local office for review. Office audits are conducted in person at an IRS office. You will be asked to bring your financial records and other documentation to the meeting.
- Field Audits:Field Audits: An IRS agent examines your records at your business or home — the most thorough audit type. Field audits are conducted in person at your home or business. Field audits are less common and are usually reserved for more complex cases.
What Happens After an IRS Audit?
After an IRS audit, the auditor will provide you with a report that outlines any changes to your tax return and the reasons for those changes. You will have the opportunity to either agree with the changes or dispute them.
How to Avoid an IRS Audit?
While the likelihood of being audited is relatively low, there are some steps you can take to minimize your risk of being audited, including:
- Accuracy:Accuracy: Numbers in the books that match reality — correct amounts, correct accounts, correct periods. Ensure that your tax return is accurate and complete.
- Documentation:Documentation: Keeping the receipts, invoices, and records that prove every entry — the audit survival kit. Keep detailed records and documentation to support your tax return.
- Timeliness:Timeliness: Records kept current at the time of each transaction — reconstruction after the fact invites errors and suspicion. File your tax return on time and pay any taxes owed on time.
- Professional Help:Professional Help: Bringing in a CPA or enrolled agent — especially for audits, filings, and structure decisions. Consider hiring a tax professional to prepare your tax return.
Conclusion
IRS Auditing may seem daunting, but with the right information and preparation, you can navigate the process with ease. Remember to be honest and accurate when reporting your income and expenses, keep detailed records, and file your tax returns on time. And don’t forget, if you’re unsure about anything related to your taxes, seek advice from a tax professional.
