What is an IRS audit?
An IRS tax audit is a review/examination of a business or individual’s books and records and financial information to ensure that taxpayers are accurately reporting their income and expenses, and paying the correct amount of tax according to the law.
Audit Selection
Selecting a return for audit does not always suggest that an error has been made. Returns are selected using a variety of methods, including:
- Random selection and computer screening – sometimes returns are selected based solely on a statistical formula.
- Document matching – when payor records, such as Forms W-2 or Form 1099, don’t match the information reported.
- Related examinations – returns may be selected for audit when they involve issues or transactions with other taxpayers, such as business partners or investors, whose returns were selected for audit.
Audit Methods
An audit may be conducted by mail (correspondence audit) or through an in-person interview and review of the taxpayer’s records. The interview may be at an IRS office (office audit) or at the taxpayer’s place of business, or accountant’s office (field audit). The IRS will tell you what records are needed. Audits can result in no changes or changes. Any proposed changes to your return will be explained.
Audit Notification
Should you be selected for audit, you will be notified in two ways:
- By mail, or
- By telephone
In the case of a telephone contact, the IRS will still send a letter confirming the audit. E-mail notification is not used by the IRS.
Your Rights During an IRS Tax Audit
Publication 1, Your Rights as a Taxpayer, explains your rights as a taxpayer as well as the examination, appeal, collection, and refund processes. These rights include:
- A right to professional and courteous treatment by IRS employees.
- A right to privacy and confidentiality about tax matters.
- A right to know why the IRS is asking for information, how the IRS will use it and what will happen if the requested information is not provided.
- A right to representation, by oneself or an authorized representative.
- A right to appeal disagreements, both within the IRS and before the courts.
Audit Length
The length of each audit varies depending on the type of audit, the complexity of items being reviewed, the availability of information being requested, the availability of both parties for scheduling of meetings and your agreement or disagreement with the findings.
Records Needed
A written request for specific documents needed, will be provided to you.
The law requires you to retain records used to prepare your return. Those records generally should be kept for three years from the date the tax return was filed.
The IRS does accept some electronic records. The IRS auditor will inform as to whether your software program is compatible with the IRS’s.
Audit Determinations
An audit can be concluded in three ways:
- No change: an audit in which you have substantiated all of the items being reviewed and results in no changes.
- Agreed: an audit where the IRS proposed changes and the taxpayer understands and agrees with the changes.
- Disagreed: an audit where the IRS has proposed changes and the taxpayer understands, but disagrees with the changes.
What Happens When You AGREE With The Audit Findings?
If you agree with the audit findings, you will be asked to sign the examination report or a similar form depending upon the type of audit conducted.
If money is owed, there are several payment options available. Publication 594, The IRS Collection process, explains the collection process in detail.
What Happens When You DISAGREE with the Audit Findings?
A conference with a manager may be requested for further review of the issue or issues. In addition, Fast Track Mediation or an Appeal request may be filed.
If you have received notice of a correspondence, office, or field audit or wish to appeal the results of an audit, you should contact a CPA or tax attorney experienced in IRS tax audits and knowledge of the tax laws.