Helpful Guide on Understanding Your IRS Audit
What's an IRS Audit & Why The IRS Performs Them?
The IRS reviews the information you sent them. That’s financial information from your accounts that they review extensively to make sure you’re not lying and possibly, stealing from them.
They perform audits on everyone, no one is exempt but that doesn’t mean you’ll get audited every time. There are obvious red flags they look at and other mistakes you can do that’ll make the IRS audit you.
However, for the most part, very few percentages of businesses and people get audited.
Why Are YOU Getting Audited?
It’s not all bad! If you’re being audited, that doesn’t mean you made an error, the IRS has different selection methods when choosing who to audit.
Method #1: Selected at Random or from a Computer Screening
The IRS has a statistical formula when deciding who to audit. For example, they think, 1 in 100 returns are fraudulent, so they created a formula that chooses 1 in every 100 returns. That’s just the concept, it’s not exactly how the formula works.
Method #2: By Correlation
You may get audited because someone else you were involved with (e.g., business partner, employee, employer) gets audited.
After being selected for an audit, an auditor will review your return and if they choose to accept it for whatever reason, they forward your return to an examining group for further examination.
Just because you get audited doesn’t mean you made a mistake. With that being said, it’s better to not have any mistakes and get audited then to have a mistake and get audited. That’s why you want to make sure to prepare taxes properly.
How Does the IRS Tell You That You're Getting Audited
They’ll send the notification through the mail to the physical address you provided. You will never get notified over the phone.
What the IRS Does During an Audit
Once you’re notified of the audit, you need to communicate with the IRS either by mail or by having in-person interviews with an auditor to review your records. The interviews may be conducted at an IRS office, your home, a public place, or an accountant’s office.
All of the information regarding the audit will be provided in the letter you receive from them.
If the IRS decides to perform the audit over mail, they’ll request more information regarding your tax returns like income, and other records. If you think it’s too much information to send over the mail, you can request to have an in-person interview.
The IRS provides guides to their auditors to better audit each industry/field in specific. If you want to see how the techniques used in your specific industry, read the Audit Techniques Guides to better inform yourself.
What Information Do You Need to Provide to the IRS?
The IRS writes down all of the documents you need, if you want to see a list of documents they might request of you, read the IRS Audits: Records We Might Request.
You may submit electronic records generated by your tax software. The IRS may prefer electronic records over other types. You’ll have to talk to your auditor to know which records they’ll need. Use of Electronic Accounting Software Records; Frequently Asked Questions and Answers
You’re required by law to keep every record ever used to prepare your tax returns three years after the date they were filed. Learn more about recordkeeping from the IRS.
Use Delivery Confirmation to Know When They Received a Response
Request delivery confirmation from your delivery service provider to stay on top of your audit and know what’s going on at all times.
How to Request Moe Time If You Need It
Mail Audits: either fax your request for more time or send it by mail. The IRS can usually give you a 30-day extension, which tends to be automatic. They’ll contact you if they can’t. But, if you already got a “Notice of Deficiency” (a.k.a CP3219A Notice) in the mail, they cannot give you more time. Your only option is to submit the remaining documentation to the U.S. Tax Court within the 90 days given to you.
In-Person Interviews: in here you can contact your auditor directly and if necessary, you can contact the auditor’s manager.
How Many Years Back Will the IRS Go Into Your Audit
The IRS can go back as many years as they require. If they wish to go back twenty years, they’ll do it. The farther back they go, the more time and effort it takes on their part as well, so it’s not always beneficial for them either.
In general, they won’t go farther than two – six years. They add more years only if they find any substantial errors.
The IRS makes an effort to audit your tax returns as soon as you filed them. It’s most likely your audit will be anytime from the past two years.
When your audit isn’t resolved, they can extend the number of years they can go back, known as a statute of limitations. The statute of limitations protects you from the IRS going back too many years, which they can override. The statute limits the IRS to three years after a return was due or was filed, depending on which one is later.
You as an individual also have a statute of limitations for requesting refunds. With additional time, you can provide more documentation supporting your position. You’d normally request more time if you do not agree with the results of the audit, or if you want to claim a tax refund or credit.
You’re not required to request an extension, but if you don’t, the auditor will be in a rush to make a decision with the information you provided.
You can find more information about extending a tax refund in the PDF, Extending the Tax Assessment Period, or by asking your auditor.
How Long Will Your Tax Audit Take
Depending on how complex the issues are, the speed at which you/IRS provide information, your or your auditor’s availability to attend scheduled meetings, and what agreements or disagreements either you or the auditor have.
It all depends here. Unless I know your specific case, I can’t give you an exact amount of time but if you analyze the variables mentioned, you can come up with a realistic number.
Know Your 10 Rights as a TaxPayer
Read your full Rights as a Taxpayer. This PDF tells you what your rights are, and also the process of the examination, appeals, collections, and refund. Here are the 10 Rights you have as a TaxPayer.
- Right To Be Informed
- Right to Quality Service
- Right to Pay No More than the Correct Amount of Tax
- Right to Challenge the IRS’ Position and Be Heard
- Right to Appeal an IRS Decision in an Independent Forum
- Right to Finality
- Right to Privacy
- Right to Confidentiality
- Right to Retain Representation
- Right to a Fair and Just Tax System
You should know all these rights to protect yourself from getting taken advantage of. I’m not saying the IRS is out to take advantage of you but it’s always good to know your rights and use them when necessary.
How the IRS Finishes Your Audit
There are three ways in which an audit can end:
- No Change
- Agreed
- Disagreed
No change means the IRS reviewed all your information and decided that nothing was wrong. Agreed means the IRS made changes and you agreed with them. Disagreed means you disagree with the changes proposed by the IRS.
Here's What Happens When You Agree with the Changes Proposed by the IRS
When you agree with the findings of the audit, they asked you to sign the report or another similar form, depending on the type of audit that was performed.
The Collection Process PDF explains all of the IRS’ payment options.
What You Can Do When You Disagree with the IRS Proposition
There are three things you can: request a conference with a manager, take an alternative solution, or file an appeal if you haven’t gone over the statute of limitations.
The IRS offers Appeals Mediation – Alternative Dispute Resolution (ADR), in which you find different options to solve the dispute.
Go to their Appeals page if you wish to file an appeal supporting your position.
What to Do If After Reading This Article You're Still Confused
We recommend you talk to us or another tax expert to guide you through this process. Getting audited can be intimating, especially for the first time.
You should also get a tax expert if you feel like you don’t have the time to go through this process. Either way, it’s always better to have someone with the expertise to handle a situation like this.