An IRS audit notice can be intimidating for anyone. Austin-Tax-Help provides IRS audit help Austin representation to assist you through the IRS Audit Process. I've prepared some of the most frequently asked questions, based on my experience, that taxpayers want to know the answers to.
What does the IRS look for in a tax audit?
The IRS generally audits tax returns to verify that the information reported on the return is accurate and complete. During an audit, the IRS may examine your income, deductions, credits, and other tax-related items on your return. The IRS may also ask for documentation to support the information reported on your return. Some common items that the IRS may review during an audit include:
Income: The IRS will verify that you have reported all of your income, including wages, salaries, tips, and other forms of compensation. They may request copies of your W-2 forms, 1099s, and other documents to confirm that you have accurately reported your income.
Deductions and credits: The IRS may review your claim for deductions and credits to ensure that you are eligible for them and that you have properly documented them. This may include charitable contributions, business expenses, and other itemized deductions.
Tax credits: The IRS may review your claim for tax credits, such as the Earned Income Tax Credit or the Child Tax Credit, to ensure that you are eligible for them and that you have properly documented them.
Filing status: The IRS may review your filing status to ensure that you have claimed the correct status on your return.
The IRS may also audit tax returns for other reasons, such as to identify and prevent tax fraud, to ensure compliance with tax laws, and to collect outstanding taxes.
What should I do if I am notified that I am under IRS audit?
If you are notified that you are under audit by the IRS, it is important to take the audit seriously and to take steps to prepare for it. Here are some things you can do if you are notified of an IRS audit:
Review the notice: The IRS will send you a notice explaining the reason for the audit and the items on your return that are being audited. Carefully review this notice and make sure you understand the specific items that are being examined.
Gather your records: You will need to provide documentation to support the information reported on your tax return. This may include receipts, bank statements, and other records. Gather these records together and make sure you have copies of everything you will need.
A couple of points here -
1. How long should I keep my records? Answer - Until you need them! Not a trick question. Records to prove basis in property are needed well beyond the normal statute of limitation period.
2. What if I can't substantiate my deduction? Answer - I've successfully used the Cohan rule (named after George M. Cohan of 1930's Broadway fame) to substantiate expenses of a building framer for wages paid in cash. As the Tax in Cohan stated, "There must be sufficient evidence in the record to permit the Court to conclude the amount of the deductible item".
Determine your representation: You have the right to be represented by a tax professional, such as an accountant or attorney, during the audit. Consider whether you want to hire a professional to represent you. I provide IRS Audit Help Austin.
Respond to the audit: Follow the instructions provided in the notice and respond to the audit in a timely manner. If you do not agree with the findings of the audit, you have the right to appeal the decision.
Keep records of your communication: Make sure to keep a record of all communication with the IRS, including any notices or correspondence you receive and any documents you provide. This will help you keep track of the audit process and will be useful if you need to appeal the audit decision.
It is important to be honest and cooperative during the audit process, but you also have the right to protect your interests. If you are unsure of how to proceed, you may want to consider seeking the advice of a tax professional.
What causes an IRS audit?
There are several factors that can increase the likelihood of an IRS audit, including:
High income: In general, taxpayers with high incomes are more likely to be audited than those with lower incomes.
Large deductions: Claiming a large number of deductions or credits, particularly those that are unusual or uncommon, may increase the chances of an audit.
Self-employed individuals: Self-employed individuals and small business owners are more likely to be audited than wage earners, particularly if they have a significant amount of business income or expenses.
Inconsistencies: Failing to report all of your income, claiming deductions or credits that you are not entitled to, or reporting information that is inconsistent with other documents may increase the likelihood of an audit.
Random selection: The IRS may also select tax returns for audit through a random selection process.
It is important to note that being selected for an audit does not necessarily mean that you have done anything wrong or that you will owe additional taxes. The IRS audits a small percentage of tax returns each year, and many audits result in no changes to the tax liability of the taxpayer.
The IRS conducts several types of audits, including:
Correspondence audits: In a correspondence audit, the IRS will send a letter to the taxpayer requesting additional information or documentation. The taxpayer can respond to the letter by mail or online.
Office audits: In an office audit, the taxpayer meets with an IRS examiner at an IRS office to discuss the items on their tax return.
Field audits: In a field audit, the IRS examiner will visit the taxpayer at their home or place of business to conduct the audit.
Taxpayer Compliance Measurement Program (TCMP) audits: TCMP audits are comprehensive audits that are conducted on a representative sample of tax returns to measure compliance with the tax laws.
Fraud audits: Fraud audits are conducted when the IRS has reason to believe that a taxpayer has engaged in fraud or made false statements on their tax return.
It is important to note that not all audits are the same, and the type of audit you are subjected to will depend on the specific issues being examined and the nature of your tax return.
What is the timeline of an IRS audit?
The timeline for an IRS audit can vary depending on the complexity of the issues being examined and the responsiveness of the taxpayer. In general, however, the audit process typically follows these steps:
Notification: The IRS will send the taxpayer a notice informing them that they are under audit and explaining the specific items on their tax return that are being examined.
Gathering records: The taxpayer will need to gather and provide documentation to support the information reported on their tax return. This may include receipts, bank statements, and other records.
Meeting with the IRS: The taxpayer may need to meet with an IRS examiner in person or by phone to discuss the audit.
Review and analysis: The IRS will review the documentation provided by the taxpayer and make a determination on the tax liability of the taxpayer.
Resolution: If the audit results in a change to the taxpayer's tax liability, the taxpayer will need to pay any additional taxes owed. If the taxpayer disagrees with the audit findings, they have the right to appeal the decision.
The timeline for an audit can vary depending on the specific circumstances of the case, and it is not uncommon for the process to take several months or more to complete. It is important to respond promptly to any requests from the IRS and to follow the instructions provided in the audit notice. If you are unsure of how to proceed, you may want to consider seeking the advice of a tax professional. I provide IRS Audit Help Austin.
What are IRS audit penalties?
If the IRS determines that a taxpayer owes additional taxes as a result of an audit, the taxpayer may be subject to penalties in addition to the taxes owed. The specific penalties that may be assessed will depend on the circumstances of the case, but some common penalties that may be imposed include:
Failure-to-pay penalty: If a taxpayer fails to pay the full amount of taxes owed by the due date, they may be subject to a failure-to-pay penalty. This penalty is typically 0.5% of the unpaid balance per month, up to a maximum of 25%.
Failure-to-file penalty: If a taxpayer fails to file their tax return by the due date, they may be subject to a failure-to-file penalty. This penalty is typically 5% of the unpaid balance per month, up to a maximum of 25%.
Accuracy-related penalty: If the IRS determines that a taxpayer's underpayment of taxes was due to negligence, disregard of rules and regulations, or a substantial understatement of income, they may be subject to an accuracy-related penalty. This penalty is typically 20% of the underpayment.
Fraud penalty: If the IRS determines that a taxpayer has engaged in tax fraud, they may be subject to a fraud penalty. This penalty is typically 75% of the underpayment.
It is important to note that these are just some of the penalties that may be imposed by the IRS. The specific penalties that may be assessed will depend on the circumstances of the case. If you are unsure of the penalties that may apply in your situation, you may want to consider seeking the advice of a tax professional.
How far back can the IRS audit?
The IRS has the authority to audit tax returns for a period of up to three years from the date the return was filed. In some cases, however, the IRS may go back further if it believes that the taxpayer has underreported their income by 25% or more. In these cases, the IRS has the authority to audit tax returns for a period of up to six years from the date the return was filed.
The IRS may also audit tax returns for a longer period of time if it believes that the taxpayer has engaged in fraudulent activity or if it determines that the taxpayer has filed a false or fraudulent return. In these cases, there is no time limit on the IRS's ability to audit a tax return.
It is important to keep good records and to retain copies of your tax returns and supporting documentation for at least three years after you file the return. This will help you to prepare for an audit if one is conducted and will enable you to provide the necessary documentation to the IRS. If you are unsure of how long you should keep your records, you may want to consider seeking the advice of a tax professional.
What can I do if a disagree with an IRS audit finding?
If you disagree with the findings of an IRS audit, you have the right to appeal the decision. Here are the steps you can take to appeal an IRS audit finding:
Request an appeal: You can request an appeal by filling out Form 12203, Request for Appeals Review. This form can be found on the IRS website or by calling the IRS at 1-800-829-1040.
Explain your position: When you request an appeal, you will need to provide a written explanation of your position. This should include any relevant information or documentation that supports your position.
Meet with an appeals officer: You may be asked to meet with an appeals officer to discuss your case. This meeting can be in person or by phone.
Wait for a decision: The appeals officer will review your case and make a decision. This decision may be to uphold the audit finding, to reduce the amount of taxes owed, or to cancel the audit finding entirely.
Consider further appeal: If you disagree with the decision of the appeals officer, you have the option to file a petition with the Tax Court. This is a formal legal process that may require the assistance of an attorney.
It is important to respond promptly to any requests from the IRS and to follow the instructions provided in the audit notice. If you are unsure of how to proceed, you may want to consider seeking the advice of a tax professional.
What are my Rights?
The Taxpayer Bill of Rights is a set of 10 fundamental rights that are recognized by the IRS and that apply to all taxpayers. These rights include:
The right to be informed: You have the right to know what you need to do to comply with the tax laws.
The right to quality service: You have the right to receive prompt, courteous, and professional assistance from the IRS.
The right to pay no more than the correct amount of tax: You have the right to pay only the amount of tax legally due, including interest and penalties.
The right to challenge the IRS's position and be heard: You have the right to challenge the IRS's position and to have your case considered fairly and impartially.
The right to appeal an IRS decision in an independent forum: You have the right to appeal an IRS decision to an independent appeals office.
The right to finality: You have the right to know the maximum amount of time you have to challenge an IRS position and to be informed of the resolution of your case.
The right to privacy: You have the right to expect the IRS to protect your personal and financial information.
The right to confidentiality: You have the right to expect the IRS to not disclose any information about you unless the law permits it.
The right to retain representation: You have the right to retain an authorized representative of your choice to represent you before the IRS.
The right to a fair and just tax system: You have the right to expect the tax system to consider your facts and circumstances and to treat you fairly.
It is important to be aware of your rights as a taxpayer and to know how to assert them if necessary. If you have any questions about your rights as a taxpayer, you may want to consider seeking the advice of a tax professional.
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