Finally, your taxes have been submitted to the IRS, and you’re ready to sit back, relax, and wait for that tax return to roll in. But then you receive an alarming notice that instead of a return this year, you are getting an audit and you start to panic. Sure, you’ve heard the word before, but what exactly is a tax audit? Are you in trouble with the IRS?
A tax audit by the IRS is serious. It’s an official examination of your accounts and records by the IRS. Most audits occur because of red flag triggers. There is no specific red flag trigger list, but triggers generally result from reported incomes that are vastly different than previous years, inconsistencies between your W2 and 1099 forms, an above average withholding for your income level, reporting thousands of travel miles when your business typically does not require you to leave town, or something as simple as a mathematical error.
Unfortunately, you may also be audited at random. Audits may also occur through “guilt by association” if your tax return demonstrates financial interactions with another taxpayer who is also being audited. Audit is somewhat of an umbrella term, as there are a few types of audits that vary in severity and the amount of documentation required by the IRS.
THE DIFFERENT TYPES OF AUDITS
An office audit is just what it sounds like —a visit to your local IRS office. Make sure to bring all of the requested documentation with you when you report to your appointment along with your ID. If you wish, the presence of a legal representative or tax preparer may be helpful, but it’s certainly not required.
Unlike an office Audit, a correspondence office is conducted by mail and can be done from the comfort of your home. The IRS sends you a letter requesting further information, and generally, you are required to respond with that information within 30 days. These usually involve tax matters that are easily and speedily resolved. It is common for the IRS to request copies of receipts, checks, or any other documentation that can help support or clarify any deductions or credits you have claimed.
A Field Audit is conducted in person at your place of business. Documentation should be ready to be presented to the IRS agent, and a legal professional or tax preparer should be present. If you have claimed a home office deduction, agents may request to enter your home. If you refuse, your deduction will most likely be denied. If you do not have a home office, you are never obligated to allow IRS agents inside unless they have a court order.
Taxpayer Compliance Measurement Program Audit
The Taxpayer Compliance Measurement Program (TCMP) audit is used to update data and write the computer scoring program for the IRS. This audit requires extensive documentation, as it examines all aspects of your tax return. For this audit, be prepared to provide any documentation that supports your return such as copies of pay stubs, checks, receipts, and even marriage and birth certificates.
While an audit conducted by the IRS is a very serious matter, it should not cause you to feel terrified of any significant punitive action, just as long as you comply and provide all of the information that the IRS is requesting. As an honest taxpayer, you work hard to get the tax return you deserve. However, sometimes simple human errors can instigate an audit.
If you do get audited, remain calm and gather the documentation you need to you support the information you have claimed on your taxes. It may also be helpful to seek advice and assistance from a tax professional.