Receiving a notice that your tax return has been selected for an audit can be unsettling. For many taxpayers, the word “audit” immediately brings to mind a stressful, complicated investigation. In reality, an audit is simply a review conducted by the IRS or a state tax agency to verify that the information reported on a tax return is accurate.
Being selected for an audit does not automatically mean you did something wrong. Returns may be selected for a variety of reasons, including discrepancies between information reported on the return and documents received by the IRS, unusual deductions, or other items that require clarification. Some returns are also selected as part of the IRS's compliance programs.
Understanding what happens during an audit, and knowing how to prepare, can make the process considerably less intimidating.
How Does a Tax Audit Begin?
An IRS audit generally begins with a notice sent by mail. The notice will explain which tax year is being reviewed, what information the IRS is questioning, and what documentation you may need to provide.
It is important not to ignore an audit notice, even if you believe the IRS has made a mistake. Audit notices typically include a deadline for responding. Waiting too long can limit your options and may result in the IRS making a determination based on the information it already has.
Before responding, carefully review the notice and compare it with the tax return in question. In many cases, working with a tax professional can help you determine exactly what the IRS is requesting and how best to respond.
What Types of Tax Audits Are There?
Not every audit involves sitting across a desk from an IRS agent. In fact, many audits can be handled without an in-person meeting.
The type of audit generally depends on the complexity of the issues being reviewed:
- Correspondence Audit: Conducted primarily through the mail and generally focused on one or a few specific items.
- Office Audit: The taxpayer or their representative may be asked to meet with an IRS examiner at an IRS office.
- Field Audit: An IRS revenue agent conducts a more comprehensive examination, which may take place at the taxpayer's home, business, or tax professional's office.
For many individuals, a correspondence audit may simply involve submitting documents that support something reported on the tax return.
What Documents Might the IRS Request?
The documents requested will depend on what the IRS is reviewing. If the audit concerns charitable contributions, for example, the IRS may request donation receipts or acknowledgment letters. If business expenses are being examined, the agency may want invoices, receipts, mileage records, bank statements, or other documentation.
Common records requested during an audit may include:
- Bank and credit card statements
- Receipts and invoices
- W-2s, 1099s, and other income records
- Business expense documentation
- Mileage or vehicle-use records
- Charitable contribution receipts
- Mortgage and property records
- Investment statements
- Documentation supporting tax credits or deductions
The goal is generally to provide the documentation necessary to substantiate the amounts reported on the return. More documentation is not necessarily better; the response should address what the IRS has specifically requested.
What Happens During the Review?
Once the requested information has been submitted, the IRS examiner reviews it against the tax return. Depending on the scope of the audit, the examiner may ask additional questions or request further documentation.
For a relatively straightforward issue, the process may be resolved through correspondence. More complicated audits, particularly those involving businesses, multiple sources of income, substantial deductions, or several years of returns can take longer.
It is also important to remember that taxpayers have rights during the audit process. You are entitled to understand why information is being requested, receive professional and courteous treatment, and have representation when permitted. A qualified tax professional can often communicate with the IRS on your behalf once the appropriate authorization is in place.
Can an Audit Result in Additional Taxes?
Yes, but additional tax is not automatic.
At the conclusion of the audit, the IRS may determine that the original return was correct and that no changes are necessary. It may also propose adjustments that result in additional tax, interest, and potentially penalties. In some situations, an audit can even result in a refund if the review identifies that the taxpayer overpaid.
If the IRS proposes changes, you will receive an explanation of those adjustments. You generally have an opportunity to agree or disagree with the findings. If you disagree, there may be additional administrative or appeal options available depending on the circumstances.
This is one reason it is important to carefully review proposed audit adjustments rather than simply assuming the IRS's initial determination must be accepted.
What If You Don't Have All Your Records?
Missing documentation can make an audit more complicated, but it does not necessarily mean the situation cannot be resolved.
Records may sometimes be reconstructed using bank statements, credit card statements, duplicate invoices, electronic records, calendars, mileage applications, or information obtained from vendors and financial institutions. What is acceptable will depend on the expense, deduction, credit, or income item being examined.
If records are missing, speak with a tax professional before responding. They can help determine what alternative documentation may be appropriate and how the information should be presented.
Should You Handle an Audit Yourself?
For a simple correspondence audit involving an easily documented item, some taxpayers may feel comfortable responding themselves. However, professional assistance can be particularly valuable when the audit involves substantial amounts, business income or expenses, missing records, multiple tax years, or questions about whether income was properly reported.
A tax professional can review the original return, help organize supporting documentation, explain what the IRS is requesting, prepare an appropriate response, and, when authorized, communicate with the IRS on your behalf.
Having someone familiar with tax procedures involved can also help keep the response focused on the actual issues being examined.
Preparation Is Your Best Defense
Good recordkeeping is one of the best ways to make an audit easier. Receipts, invoices, statements, mileage logs, and other tax records should be organized and retained according to applicable recordkeeping requirements.
For business owners and self-employed taxpayers, keeping personal and business finances separate can be especially important. Maintaining accurate books throughout the year can make it much easier to substantiate income and expenses if questions arise later.
Most importantly, don't panic if you receive an audit notice. Read it carefully, pay attention to the response deadline, gather the appropriate documentation, and seek professional assistance when necessary.
An audit may feel intimidating, but with proper preparation and professional guidance, it can often be managed in an organized and straightforward manner.
Need Help With an IRS or State Tax Notice?
If you've received an audit notice or another communication from a tax agency and aren't sure what it means or how to respond, Moore & Paquette Tax Group can help you review the notice, understand what is being requested, and determine the appropriate next steps.
Disclaimer: This article is provided for general informational and educational purposes only. It is not intended to provide tax, legal, or financial advice and should not be relied upon as a substitute for advice regarding your individual circumstances. Tax laws, regulations, and IRS procedures can change, and the appropriate response to an audit depends on the specific facts involved. Please consult with a qualified tax professional regarding your particular situation.