Legacy Law Blog

Receiving an Internal Revenue Service (IRS) audit notice can be a daunting experience for many taxpayers. However, understanding the process and knowing how to respond can significantly reduce anxiety and ensure a smoother experience.

In this post, we'll delve into what an IRS audit is, why you might be selected for one and the steps you can take if you receive an audit notice.

What is an IRS Audit?

An IRS audit is a review or examination of an individual's or organization's financial records to ensure that the information reported on their tax return is accurate and compliant with tax laws. The primary goal is to verify that all income is correctly reported and to ensure that the taxpayer has claimed only the deductions and credits to which they are legally entitled.

Why am I Being Audited?

The IRS uses various methods to select tax returns for audit, including:

• Random Selection and Computer Screening: Returns are compared against norms for similar returns, often using statistical formulas developed from previous audits.
• Related Examinations: If your return involves transactions with other taxpayers who are being audited, your return might also be selected.
• Discrepancies and Errors: Inconsistencies in reported income, failure to meet reporting thresholds or incorrect information can trigger an audit.

Types of IRS Audits

The IRS conducts audits in three main ways:

1. Mail Audit (Correspondence Audit)

• This is the most common type, accounting for about 80% of all audits.
• The IRS will send a letter requesting additional documentation to support specific items on your return, such as charitable donations or business expenses.
• You can respond by mailing or faxing the requested documents.

2. Office Audit

• This type of audit requires you to visit an IRS office and meet with an auditor.
• It's more in-depth than a mail audit and may involve questions about your income, lifestyle or business operations.
• You have the right to bring a tax professional to represent you.

3. Field Audit

• This is the most thorough type of audit, often used for complex or high-income returns.
• An IRS agent will visit your home or business to review your financial records and discuss your tax return in detail.

What to do if You Receive an Audit Notice

If you receive an IRS audit notice, here are the steps you should take:

1. Stay Calm and Read the Letter Carefully

• Understand what the IRS is questioning and what documentation they need.

2. Gather and Organize Your Documentation

• Collect all requested documents, such as tax returns, W-2 forms, receipts and bank statements.
• Organize your records to facilitate the audit process.

3. Respond Promptly and Clearly

• Address each item the IRS is questioning and provide the requested documentation.
• Include a cover letter summarizing your response and referencing the documents you’re submitting.
• If you need more time, contact the IRS to request an extension.

4. Prepare for In-Person Audits

• If required to attend an office or field audit, prepare thoroughly by bringing all requested documents and by being ready to answer questions about your tax return. The IRS may offer the option to hold the in-person meeting virtually if requested.

5. Review the IRS’s Findings

• After the audit, carefully review the IRS's report of their findings.
• If you agree with the findings, sign the agreement and arrange to pay any additional taxes owed.
• If you disagree, you have the right to appeal the decision.

What Happens if you Don’t Respond to an Audit Notice?

Ignoring an IRS audit notice can lead to severe consequences. The IRS may assume you agree with their proposed changes, resulting in additional taxes, penalties and interest. Non-response can also trigger enforced collection actions, such as wage garnishments or bank levies.

Can I Handle an IRS Audit Myself?

While it's possible to handle an audit yourself, seeking professional help can be beneficial, especially if the audit is complex or if you're unsure about how to respond. Tax professionals can guide you through the process, ensure you provide the necessary documentation and represent you in meetings with the IRS.

An IRS audit is a routine process aimed at ensuring tax compliance. By understanding the types of audits and knowing how to respond to an audit notice, you can navigate the process more effectively. Remember to stay calm, gather your documentation and respond promptly to any IRS requests. If needed, don't hesitate to seek professional assistance to ensure the best possible outcome.