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Irs Audit: Returns
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IRS tax audit is a face-to-face contact with an IRS auditor. About one-third of IRS "tax audits" are in the form of letters asking for explanations of various tax items on a tax return or supporting documentation. If you receive a tax audit letter from the IRS, examine your records to determine the nature of the tax audit issue. The IRS may want to audit the entire tax return or could audit just a portion of it, for example, meals and entertainment or automobile and travel expenses. If the issue concerns documenting a tax deduction or a tax credit, send the IRS copies of the appropriate documents. Do not send the IRS originals, as they may get lost in the mail or at the IRS.
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The IRS audit is something virtually all tax payers worry about and with good reason. An audit requires that all of the information on the tax return be shown to be accurate. An audit can happen to anyone at virtually any time. Most importantly, it is not an accusation that you have done something wrong. Rather, it is an opportunity for you to prove that your return is accurate to the best of your knowledge. The good news is that it does not have to be that bad if you hold on to your receipts and are honest about what you are claiming on your tax return.
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When the IRS completes an audit, the examining agent prepares a report proposing ways to adjust your tax return. You sign the report if the adjustments proposed in it are acceptable. If you do not agree with the agent's conclusions, you or your representative and the IRS agent may try to find a compromise. If settlement is impossible, the IRS local District Director will send you a "30-day letter." This letter notifies you of your right to appeal the proposed changes within 30 days and outlines the proposed changes to your return. The letter will explain what steps you should take, depending on which action you choose.
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An IRS audit is when the IRS requests that you contact them to provide proof of deductions, income, or to consider the treatment of various items on your tax returns. Many people mistakenly think that all they need to do is to bring their receipts and other information to the revenue agent as verification. What they don't realize is that the IRS audit person is trained to ask probing questions, and to come up with reasons why your deductions are not acceptable. In fact, the professional community has complained that in an IRS audit they often do not distinguish between the questions asked in a general audit vs. a criminal investigation. You will be asked financial status questions focusing on your lifestyle, standard of living, and other elements unrelated to the items on your tax return. This is one reason why even if you have receipts, and feel that your return was prepared correctly, you could still be in jeopardy.
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Rule # 1: The IRS Audit Process is an Adversarial Relationship! IRS Auditors are looking for adjustments to your tax return that convert into additional taxes, penalties, interest and a nice promotion or bonus.
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The IRS can audit you for three years after you file your return. In reality... most returns are audited within 18 months of filing. This gives the IRS time to do the review and request the appropriate substantiation before the statute of limitations (usually the three-year period) ends. Once the statute has run out, the IRS normally cannot audit your return, and your expenses are insulated from examination. It has been claimed that the later you file, the less likely it is the IRS will pick your return to be examined. The IRS still insists that agents are not graded or evaluated on the amount of money they collect until -- surprise!
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