Published on: April 09, 2019
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The idea of an IRS audit can be frightening no matter how diligent you are about reporting your income to the IRS. While the risk of being audited is quite low for most (statistics indicate that in 2016, the IRS audited only about 0.5 percent of all returns), being aware of what audits are, why they are conducted, and how to know that you are being audited is essential for every taxpayer.
An audit is an assessment done by the IRS to determine whether the financial information you have provided is accurate and in keeping with tax laws, and if the tax amount reported is correct. Audits can be conducted through mail or via in-person interviews.
Returns that have errors or discrepancies, or claim high risk of fraud deductions and credits, such as a home office or the earned income tax credit, are at greater risk of being subjected to an audit. Sometimes, your name is randomly selected through a computer screening, or your return has duplicate information, such as you and another taxpayer claiming the same dependent.
Also under the microscope are taxpayers with an income of $1 million or those with no income. Excessive spending and large deposits, not reporting part of your income, claiming suspiciously high deductions, or no deductions, on your self-employment income are some other reasons you may find yourself getting attention from an IRS auditor.
According to the IRS, the agency does its best to audit tax returns as quickly as possible, and the majority of audits are performed on returns filed in the last two years. The IRS can go further back if there is a pattern of incorrectly claimed deductions and credits or under reported income.
If the IRS has shortlisted you for an audit, then you will be informed of this through a written notification that will be sent to your last recorded address. The IRS usually doesn’t notify you of an audit via phone or email, so be wary of any email that claims to be about an IRS audit. There are different types of IRS audit letters, and the kind you receive will depend on what the issue is with your tax return.
In most cases, a Notice of Audit and Examination Scheduled will be issued. This notice is to inform you that you are being audited by the IRS, and will contain details about the particular items on your return that need review. It will also mention the records you are required to produce for review. The deadline to submit these documents and materials will also be mentioned in the notice. In either a mail audit or an in-person audit, IRS must give you time to respond with, or prepare, the necessary documents.
Once the audit is completed, an IRS General 30 Day Letter will be sent to you outlining the proposed changes to your tax returns. It will be accompanied by a form detailing the auditor’s findings known as Proposed Changes/Adjustments to Your Tax Return. If you agree with the findings, you can sign the agreement form that accompanies it, known as Request for Consideration of Additional Findings. If not, you can file a tax appeal or lodge a protest with the tax office that conducted the audit. You have 15 days to do this.
If you get a Notice of Deficiency, also known as a 90-Day Letter, then it means that you have unpaid taxes. The notice will contain details about the year(s) taxes are owed. You will have 90 days to pay the amount specified or to file a petition with the tax court within 90 days. You must treat this letter seriously and respond to the issue immediately, so you don’t end up without options to address the balance in the letter.
If you are being audited, it is highly likely that the assessment year is not the current one. Maintaining accurate personal and business tax records, filing an error-free tax return, and being punctual about filing can further minimize your chances of being subjected to an audit.