One of the most dreaded letters that you can receive is from the IRS and is marked “Official Business Only.” Oftentimes, this means that your taxes are the subject of an audit. When this happens, you are at risk of getting slammed with a large tax bill, complete with interest and penalties. While we cannot tell you that everything will be alright if you are being audited, we can explain to you the audit process and how you should handle being audited.
Tax Audit Timeframe
At the outset, it is important to note how long the IRS has to audit your taxes. In most cases, the IRS has three years from the date that you file your taxes to subject you to an audit. In other words, if the IRS does audit your taxes, it can go back for three years of returns. In more limited instances, such as when the IRS suspects a gross underreporting of your earnings, it has six years to audit your taxes.
When it comes to the actual audit, the idea of an IRS auditor showing up at your door, while it is dreaded, is not the only type of audit. In fact, most audits involve only letter correspondence between the IRS and you. Many IRS audits begin when the IRS simply sends you a letter questioning a certain entry on your tax filings and requests that you send further documentation of that particular entry or expense. Then, based off of your response, the IRS may adjust your tax liability. This type of IRS audit is called a Correspondence Audit, and it comprises roughly three quarters of the audits performed by the IRS.
In other instances, you will get a letter directing you to come into the IRS office. When this happens, you will likely be asked questions about the area at issue and will have to provide information related to this inquiry. This will likely not be as complicated as a full-fledged audit, but is more complex than a Correspondence Audit.
The Field Audit
The doomsday scenario to being audited by the IRS is the Field Audit. This is the type of experience that people have come to associate with being audited. The Field Audit is when the IRS comes to your home or office and will request receipts and documentation to determine your total tax liability. This is a more open-ended type of audit, and the IRS is not limited in the questions that they can ask or the information that they can request. Most likely, the IRS will likely want to review your financial records and have a conversation with you. If you have a business, their document requests may be a little bit broader. You should expect that this audit will be intrusive and you will most certainly be put on the spot by the auditor more than once.
The most pressing questions that anyone being audited by the IRS will have is how they should prepare and what they should do while being audited. The most important thing to know is that IRS auditors are generally very well-trained at their jobs. Most likely, you will have an auditor who has seen quite a bit during the course of their career. This means that you should not expect to “put one over” on the IRS. If someone exists in your records to be found, you should expect that the IRS will know how to find it. As a result, you should not enter an audit with your goal of trying to keep the IRS from finding things. Once the auditor discovers what they are looking for, any efforts to obscure information or being less than forthright with the IRS may make them less willing to do anything other than throw the proverbial book at you. Similarly, the auditor is just a professional trying to do their job. If you act towards them in an antagonistic and confrontational manner, it will only make things go worse.
The First Course of Action,/h2.
The first action to take is to make sure that you have gathered all of your relevant documents and receipts. It generally looks better to the auditor if you are well-prepared and if they do not have to hunt down your documents. An auditor who has to undertake major effort just to obtain your documentation will likely be an agitated auditor, and that is a bad start to your audit. Go back three years and make sure that your paperwork is well organized and easily referenced.At the same time, you must attempt to strike a balance when giving information to the IRS. While you should definitely not try to hide anything from the auditor, you should also not be overly generous with information. Giving the auditor more than what they need may not help you. Instead, it may only serve to give the auditor more areas about which to question you. It may not be the best idea to overshare with the IRS in attempt to get on their good side. Most likely, it will not work. What you should do is answer all of the questions that have been asked fully and honestly. However, you should give the IRS the answers they are seeking and the information that they need without giving them anything more. This means that you are being transparent and cooperative without do anything that could harm your self-interest.
Hire a Professional
One of the most important things that you can do in the event of an audit is to get help. While you may have a good idea of your financial situation, you may be overmatched when dealing with the IRS on your own. IRS agents know how to make people talk and, many times, you need professional help on your side to help you through this experience. There are many professionals out there who have a deep experience in dealing with an IRS audit since they have seen it many times before. They will know exactly how much information you should give the IRS in response to their questions.
The most important thing to do if your are being audited by the IRS is to take a deep breath. Yes, this is a frightening experience and there are large potential consequences. There is more of a chance than not that you will have to pay some extra taxes as a result of an audit. That is what the statistics say. Recognizing that, you should not do anything in a state of panic because it could have ramifications for you down the line. If you believe that you may have criminal liability, you should definitely retain the services of an attorney.