What should you expect if you are under an IRS Tax Audit?

Opening the mail to find an IRS Audit notfication letter is never fun. IRS Audits can be handled effectively in various different manners. But now that you are looking at the IRS Audit notifcation in your hands here is what you need to know ...

An IRS audit is a review/examination of an organization's or individual's accounts and financial information to ensure information is being reported correctly, according to the tax laws, to verify that the amount of tax reported is accurate.

What is an IRS Audit?

Although IRS Tax Audits can be intimidating, proper representation can result in a favorable outcome. An IRS audit is a review/examination of an organization's or individual's accounts and financial information to ensure information is being reported correctly, according to the tax laws, to verify that  the amount of tax reported is accurate.

$ 12 Billion * Value of tax dollars in dispute in 2016

Last year the IRS audited approximately 1.2 million returns. These audits could have been very simple (single issue) examinations or the audits may have been extremely thorough and sifting - examining each and every part of the tax return filed by the taxpayer. 

In any case, receive a notice by the IRS of their intent to audit your return is the very first step in the audit process.

How did you get selected for an IRS Audit?

Selecting a return for audit does not always suggest that an error has been made. It is possible that an audit can result in no additional tax due to a taxpayer.  This is called a no change audit.  In addition. an audit can even result in a tax refund. This result are discussed in the audit determination section of this article.

Tax Returns to be reviewed by the IRS for examination are selected using a variety of methods, including:

  • Random selection and computer screening - sometimes returns are selected based solely on a statistical formula.
  • Document or Information 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.
  • Participation in Tax Avoidance Schemes  - Some returns are selected based on efforts by the IRS to identify abusive tax avoidance schemes and strategies.

IRS Audit Selection Methods

Examples of transactions that could send up a red flag and trigger a potential IRS audit include:

  • the use / abuse of certain trusts
  • Limited Liability Companies (LLCs)
  • Limited Liability Partnerships (LLPs)
  • International Business Companies (IBCs)
  • foreign financial accounts
  • the use of offshore credit/debit cards

An overview of those types of schemes can be found here.

What are your Rights During an Audit?

In 2013 it was recommend that the IRS issue a Taxpayer Bill of rights so that all taxpayers would know what to expect when dealing with the IRS.  There has always been many claims by taxpayers large and small that alleged that the agency sometimes would abuse their power when dealing with taxapyers. These rights include:

Rights during and IRS Tax Audit

  • 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.

Taxpayer Bill of Rights issued by the IRS

In addition to your rights under an audit, you also have additional rights that the IRS want you to know (as seen in this video above).

What are the possible outcomes of an IRS Audit?

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. If this happens the IRS will issue a "no change letter" inidcating that no additional taxes are due.
  • Agreed: an audit where the IRS proposed changes and the taxpayer understands and agrees with the changes. Agreement can be that some issues are won and some are lost during the audit review process.
  • Disagreed: an audit where the IRS has proposed changes and the taxpayer understands, but disagrees with the changes.

IRS Tax Audit Guide by the Agency

What Happens When You AGREE With the IRS 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. You may choose to pay in full, or pay in installments.
What Happens When You DISAGREE with the IRS Audit Findings?
  • A conference with a manager may be requested for further review of the issue or issues.
  • In addition, Appeals Mediation Programs or an Appeal request may be filed.

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