What is an IRS audit?

An IRS audit leaves anyone breathless. But nevertheless, understanding what an Internal Revenue Service audit is and how it works might put some of your fears to rest. At the end of the day, this way you will know what to expect from the IRS audit procedure and -hopefully- how to avoid it.

Now you should know that not all audits are the same. Some are more serious and important than others. Therefore, we could say that identifying what type of audit you are facing will also help you succeed.

Are you ready to delve into the tax mysteries of the IRS? So, let’s get started! Take a deep breath and find out everything you need to know about IRS audits.

What is an IRS audit?

What is an IRS audit?

An IRS audit is nothing more than a review of your tax account information. Through it, the tax agency will verify that you are providing accurate information and that your tax returns follow the applicable tax laws. In other words, through an audit, the IRS certifies that what you are declaring does not contain errors.

Why does the IRS conduct audits?

In a nutshell, the IRS audits people to minimize tax evasion. Audits are sometimes random, but there are cases where they are ordered on a reasonable basis. If a taxpayer files a suspicious return, the agency may do an audit to verify that what they are paying is really what they owe the federal government.

What happens if the IRS audits me?

The procedure the IRS will use in an audit will depend on the type of tax violation and the level of seriousness or importance of the potential tax law violation.

correspondence audit

That is, an audit in writing that uses postal mail as a means of communication. In this case, the taxpayer will receive a letter from the IRS. Generally, this letter indicates that there is an outstanding debt. Why could this happen? Well, for a math error in statement wave omission of income, for example, a W-2 form.

There are two decisions the taxpayer can make upon receipt of this letter: agree with the IRS and pay the bill (which will include taxes, interest and the penalty) or disagree with the debt and dispute it.

Tip: If you choose the dispute route, hire a tax professional to help you write the pleadings you will submit to the IRS.

Now, this is not the only communication you could receive from the IRS. In some cases, tax agents send a communication to request more information from the taxpayer.

As usual, just send the documentary support of a deduction, a tax credit or any other position that has been taken in the statement. In this case, we would be facing a small audit by correspondence. What could the IRS ask of you?

  • A receipt from your credit card
  • A bill for a deductible expense
  • The copy of the check you canceled
  • A signed letter from the charity you donated to

Tip: If you do not have the supporting document, it would be best to accept the debt and pay the amount. Of course, you could choose to argue your points in favor – and even litigate – but evaluate if the amount owed is worth the effort, time and money that you will invest.

office audit

Many people fear office audits, but they shouldn’t. Although it is still an audit – like any other – not as intrusive as field audits and not as comprehensive as line-by-line audits. In this case, the taxpayer will receive a letter with a appointment to go to the IRS office. If you can’t go that day, you can ask for a reschedule.

The taxpayer can go alone to the IRS office, but it is recommended that you attend the appointment with your accountant.

Note: Typically, these types of audits deal with reimbursements. If an agent decides that you have failed to prove a claimed refund – and you think you are right – you can grieve this decision.

Remember: Receiving a 4883C summons letter from the IRS does not mean that they want to audit you. Normally, the tax collection agency sends this letter to verify the identity of the taxpayers and to verify that there has been no identity theft.

field audit

In field audits, the IRS visits the taxpayer’s home or place of work, although it could also be that they go directly to their accountant’s office.

Being field based, this audit is arguably more intrusive, but not just because it happens on your property. And it is that, in the field audits, the auditor is not limited to searching for or examining a specific item. You can go further.

Tip: Ideally, you’re not alone in an IRS field audit. It is preferable that you request the accompaniment of a specialized lawyer with fiscal control or a chartered accountant.

Line by line audit

These are the audits most feared by taxpayers because, in this case, a randomly chosen person must pass a thorough review of their statement. These investigations are ordered in compliance with the National Investigation Program and include the verification of a declaration line by line.

How to avoid an IRS audit?

There are certain ways to avoid an IRS audit. How? Basically, eliminating the reasons that lead them to perform an audit in the first place:

  • Be careful not to make mistakes in the calculation. Try to use a good tax filing program and, if possible, review the information several times.
  • be transparent. You must report all your income to the IRS. Check that none have been left out of your return to avoid problems.
  • Do not claim donations that you have not made. You should always have supporting documents. Otherwise, you will have a hard time in the audit.
  • If you’re an independent contractor, don’t try to hide your real income. If you report losses over and over again on Schedule C, you will set off IRS alarms!
  • Keep business expenses under control. Remember that purchases must be ordinary and necessary for the type of business you do.
  • Don’t try to fool the IRS. Many taxpayers use the home office deduction to pay less taxes. If you don’t work from home, don’t!
  • First of all, precision! Try not to overdo it when you round figures and keep all your supporting documents on hand.
  • When in doubt, hire a professional! If your tax return makes you cry and you feel like you’re missing some information, don’t risk it and hire someone else to do it for you.

Curiosity. You shouldn’t be afraid of an IRS audit. Statistics show that the IRS has significantly lowered its number of audits. In fact, the odds of being audited by the IRS today are not even 0.5%.

Tip: If the statistics are not on your side and you have to go through an IRS audit, we advise you to download and read Publication 556 well to fully understand your rights.

In short, what you need to know about IRS audits

To summarize everything included in this article, we have made a list of the most important points. Will you come with us to see it?

  • First of all, seek knowledge! Understanding what types of audits the IRS does and what to expect from each will help you stay calm throughout the process.
  • Correspondence audit (by post). Those that are carried out through communications are called “correspondence audits”. This is the simplest type of audit out there because what it will usually return is that you owe more than you think.
  • How serious are correspondence audits? Some correspondence audits are more serious than others. Examples? When the IRS requires you to submit certain documents to support a specific tax credit or deduction.
  • Office audits (directly at the IRS). Office audits are face-to-face. In this case, the IRS will summon you to the office to deal with certain specific elements of your tax return. Is serious? It depends. As long as you attend the appointment and collaborate with the tax representative, you should not worry.
  • Field audits (the IRS visits you): Field audits are the most tedious (and also the ones that generate the most anxiety in the taxpayer). An IRS agent will visit you at your home or office to thoroughly examine every tax record you have. It is possible that, instead of going to your home or place of work, the audit will be carried out at your accountant’s office.

If you want to know more about IRS audits, be sure to visit this special section on their website.

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