What is an IRS Audit and How Does it Work?

IRS audit

An IRS audit is a review of your tax return to ensure that you have accurately reported your income, expenses, and other tax-related information. The audit is conducted by the Internal Revenue Service (IRS) to ensure compliance with tax laws and regulations.

While the thought of an IRS audit can be daunting, it’s important to understand what the audit process entails and how to prepare for it. In this article, we’ll provide an overview of the IRS audit process and what you can expect.

What Triggers an IRS Audit?

The IRS has a variety of methods for selecting tax returns for audit, including computer screening and random selection. However, there are certain red flags that may increase your chances of being selected for an audit, including:

High Income:

 If your income is significantly higher than others in your tax bracket, you may be more likely to be audited.

Inconsistencies in Your Tax Return:

 If there are discrepancies in your tax return, such as large deductions or unreported income, you may be more likely to be selected for an audit.

Certain Deductions: 

Certain deductions, such as home office expenses or charitable contributions, may be more likely to trigger an audit.

What to Expect During an IRS Audit

The audit process can vary depending on the type of audit you receive. There are two main types of audits: correspondence audits and field audits.

Correspondence Audits: 

These are the most common type of audit, and they are conducted through the mail. The IRS will send you a letter requesting additional information or clarification on certain items on your tax return. You will need to respond to the letter and provide the requested information.

Field Audits: 

Field audits are in-person audits that are conducted at your home or place of business. During a field audit, an IRS agent will come to your location to review your records and tax-related documents.

During an IRS audit, you can expect the following:

Notification: The IRS will notify you of the audit through mail or phone. This notification will explain the reason for the audit and specify the tax year(s) being examined.

Documentation: You will need to provide the IRS with supporting documentation for the items being audited. This may include receipts, bank statements, and other records that support the information reported on your tax return.

Communication: The IRS will communicate with you regarding the audit process and request any additional information or documentation. It is important to respond promptly to any requests from the IRS to avoid potential delays in the audit process.

Examination: The IRS will examine the information and documentation provided to determine if any changes need to be made to your tax return. This examination may be conducted through a correspondence audit, where the IRS communicates with you through the mail, or a field audit, where the IRS visits you in person to review your records.

Outcome: The outcome of the audit can result in a conclusion that your tax return is accurate as filed, a proposed change to your tax return, or a tax bill for additional taxes owed. If the IRS finds any discrepancies, they may also assess interest and penalties on the additional tax owed.

Appeal: If you disagree with the outcome of the audit, you have the right to file an appeal. This must be done within 30 days of the date on the IRS’s final determination letter.

It is important to note that the IRS has the right to audit your tax return at any time within three years of the filing date, or six years if they suspect a significant underreporting of income. It is also important to keep accurate records and maintain good documentation, as this can assist you in the event of an audit. If you are unsure about how to proceed during an audit, you may consider seeking the assistance of a tax professional.

What Documents Do You Need to Prepare during an IRS Audit?

Regardless of the type of audit you receive, you should be prepared to provide the following items:

  • Copies of your tax returns
  • Supporting documentation for items on your tax return, such as receipts, invoices, and bank statements
  • Records of any changes or corrections you made to your tax return after filing
  • How to Prepare for an IRS Audit

The best way to prepare for an IRS audit is to stay organized and keep accurate records of your income, expenses, and other tax-related information. Here are some tips to help you prepare:

What to do If You Receive Notice of an IRS Audit

There are several steps you can take if you receive notice of an IRS audit. For instance, you can begin with:

Keeping Accurate Records: 

Maintain accurate records of your income, expenses, and other tax-related information, including receipts, invoices, and bank statements.

Responding Promptly:

 If you receive an audit notice, respond promptly and provide the requested information. The quicker you respond, the quicker the audit process will be.

Hiring a Tax Professional: 

Consider hiring a tax professional to assist you with the audit process. Tax professionals have extensive knowledge of the audit process and can help you prepare, respond to questions, and negotiate on your behalf.

In conclusion, an IRS audit can be a confusing and intimidating experience, but it’s important to understand the audit process and how to prepare for it. By being organized and well-prepared, you can reduce stress and ensure a positive outcome. If you receive an audit notice, don’t hesitate to reach out to a tax professional for help.

Learn More About Milikowsky Tax Law

At Milikowsky Tax Law, we have over a decade of experience working with IRS and tax audits. We’re experts in defending business owners in the face of IRS or other government agency audits.

Interested in learning more? Read on to learn how to respond to an IRS audit in 2022.