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How Do I Know If I’m Being Audited

A universal fear for American taxpayers is getting audited by the IRS. Even if you spend a long time pouring over the details of your return, you’re probably still a little nervous when you file it. 

The easiest way to soothe your fears is to have a tax professional review your return. Not only can they help prevent you from getting audited, but they might also be able to save you some money too. 

It’s true that audits are quite a headache and usually come with severe financial consequences. So you should absolutely be taking them seriously. However, the odds of being audited are probably much lower than you might be thinking. 

Unless you make several hundred thousand dollars a year, you have less than a one percent chance of being audited. 

How Do You Know If You’re Being Audited?

If the IRS has flagged your return for errors and requires an audit, you’ll be informed via a written notice sent to your last known mailing address. 

Unless you receive a certified notification in the mail, then it’s not a real audit. There are a few scams involving emails or phone calls from individuals claiming to be the IRS. Be wary of these scams and never provide any financial information to questionable sources. 

The IRS will send out a Notice of Audit and Examination Scheduled that contains specific details from your return that were flagged. It will request that you produce specific records and provide a timeline in which to comply. 

You should be careful when talking with the IRS, as you could end up accidentally incriminating yourself. If you’ve been served with an audit notice, you should immediately consult with a tax professional. They can prevent you from getting into deeper trouble and advise you on how to proceed through the audit.  

What Does Audit Mean?

An audit is a thorough examination of your financial statements and tax records most commonly performed by the IRS. The goal is to determine if the information on your tax returns is an accurate and fair representation of your finances. 

It’s important to note that being audited by the IRS isn’t necessarily an indication of wrongdoing. No charges are filed during an audit, and no accusations are made. The IRS will simply request information involving your finances and want to clear up any potential errors. 

These are a few examples of the records most commonly requested during an audit:

  • Business receipts, billing details, or canceled checks
  • Legal papers such as marriage licenses, divorce settlements, or property acquisition
  • Loan agreements including the total amount, terms, and financial institution involved
  • Medical and dental records
  • Employment documents

What Triggers An Audit?

The IRS has to process the annual tax returns of every American, and they don’t have time to audit everybody. Instead, they’ve established certain criteria that can trigger an audit when met. Something as simple as misspelling your name or not entering your social security number can result in an audit. 

The audit selection process involves using statistical formulas and mathematical algorithms. If the numbers don’t add up according to these equations, the IRS will request a closer look. Having errors or discrepancies in your return can cause your audit to be flagged. 

Reporting an incorrect taxable income, mathematical errors, and rounded numbers are a few of the most common triggers for an audit. The IRS may also want to review your information if you claim a large number of dependents, deductions, or credits. 

It’s also possible that you might be audited because someone you did business with had errors on their return. The IRS would want to clear up any potential mistakes and make sure their records are accurate.   

How Are Audits Conducted?

There are two different types of audit possible: mail or in-person. The most common type of audit is completed through the mail. You’ll need to send any documents or records requested by the IRS through the mail. Since it takes so long to exchange documents, mail audits will usually take about three to six months to complete. 

An in-person audit will involve a face-to-face meeting with an IRS agent. They will either request that you come to the local IRS office, or they will visit you at your home. It’s pretty rare to have an in-person audit as the IRS doesn’t have enough agents to travel and meet everyone being audited. Your audit will take place most of the time without speaking to or meeting with anyone from the IRS. 

How Far Back Do Audits Go?

It takes the IRS quite a bit of time to process tax returns, but they generally try to audit them as they are filed. Sometimes they might need to go back as far as three years ago to review any issues. 

The IRS might look into taxes filed as long as six years ago in rare cases. However, these are when they investigate tax fraud or evasion and not the garden variety audit. 

There is a statute of limitations on IRS collections of ten years. Unless there are extreme circumstances, the IRS usually won’t bother going past this time frame. 

When Does An Audit End?

After you turn over the information requested by the IRS, one or more agents will thoroughly review them. They’ll be double-checking any math or information that led to the return being flagged in the first place. 

The audit will end in one of three different scenarios:

  • No change. The audit concludes that all of the items being reviewed were accurate, and it’s not necessary to make any changes on the return.
  • Agree. The IRS proposes making specific changes to your return, and you agree with them.
  • Disagree. The IRS proposes making specific changes to your return, but you disagree with them.

What Happens If You Agree With The Audit?

If you understand and agree with the proposed changes by the IRS, you’ll be asked to sign an examination report. The report is just a record admitting that the audit was completed and you agreed to make the necessary changes. 

Most of the time audits end with taxpayers owing more money to the IRS. You will have the option of making a one-time payment or enrolling in a payment plan. You’ll work out an established timeframe for repaying the liability. The IRS prefers getting the amount owed settled as soon as possible, but they have been known to extend time frames for large sums. 

It’s common for the IRS to tack on various penalties, fines, or interest charges to these payment plans. It may end up costing you a few extra dollars, but failing to pay could get you charged with tax evasion.

What Happens If You Disagree With The Audit?

If you disagree with the findings of the audit, you’ll have a few options to choose from. You will definitely need to enlist the help of a tax attorney if you haven’t already. 

The first step is that you’ll need to appear before an appeals hearing. These hearings will usually happen around 60 days after you file the appeal. You’ll have the opportunity to present your case to the IRS and offer a counterargument to their claims. 

The Appeals Officer will take a fresh look at any documentation, files, reports, or other evidence provided. Taxpayers and the IRS are usually able to reach an agreement during the appeal process. If an agreement is made, you would sign a Consent to Proposed Tax Adjustment Form and establish payment plans. 

If you are unable to settle the difference, your next option is tax litigation. You can only file a petition in Tax Court if you’ve received a Notice of Deficiency from the IRS. The Notice of Deficiency will have a deadline to file your case with the Tax Court. The trial will be set, and you’ll need to prepare your case. 

Many cases are settled before the start of the trial as compromises are made to avoid the process. If there is no settlement made then the trial will start on the established date. It’s normal for a judge to hear the case instead of a jury. 

The taxpayer and the IRS will both present their cases using evidence, witnesses, and cross-examination. The judge will render a decision at the end of the trial and determine how much money is owed as well as any penalties or fines. 

The Takeaway

Tax audits can be a very stressful and costly experience for a taxpayer. The process will usually take a few months and rarely ends with the IRS paying the taxpayer more money. 

The IRS only audits a few hundred thousand tax returns every year, so it’s unlikely that you get audited. However, if you do receive a notice of an audit, you’ll need to take it seriously. 

The best option would be to talk with a tax professional. Coast One Tax Group experts have more than 25 combined years of experience dealing with audits. They can advise you on the best course of action and help you settle your back taxes with the IRS.

SOURCES:

IRS Update on Audits | IRS

Tax Return Question: What Are the Odds of Being Audited by the IRS? | The National Interest

What Is a Financial Audit? | Investopedia

IRS Audits: Records We Might Request | IRS

Top Audit Triggers That Catch the Attention of the IRS | The Balance

IRS Audits | IRS