A tax audit by the Internal Revenue Service is an examination of an organization or individual’s finances, and is done to ensure that information is being reported in accordance of tax laws and they are taxed correctly.
If you or your organization has been selected for an audit by the IRS, this does not always mean that there is an error or taxes owed. Returns are selected based on three methods:
- Random Selection: Returns can be selected randomly on a computer and are based on a mathematical formula.
- Document Matching: When records provided by an employer, such as Form W-2 or Form 1099-Misc, do not match the information reported by a taxpayer.
- Related Examinations: Returns may be selected for an audit when they are related to a business partner or business investor who was selected for an audit.
IRS records can be conducted through the mail or an interview. Interviews can happen at an IRS office, the taxpayer’s home, taxpayer’s business, or taxpayer’s accountant’s office. The IRS will tell you which records are needed. It is required by law for taxpayers to keep the records used to prepare your return, usually for three years from the date the tax return was filed. It is a better idea to keep these records for longer than three years so you are able to refer back to them at any time since often I have found this to be very helpful. Tax audits can result in no changes or changes, and any proposed changes will be explained.
If you are audited, you still have rights, and these rights are maintained throughout the examination, appeal, collection and refund process. You have the right to:
- Privacy and Confidentiality of your information.
- To know why the IRS is asking for information, how the IRS will use the information and what will happen if the information requested is not provided.
- To represent yourself or seek representation of a tax attorney.
- Appeal disagreements.
Audits vary in length of time due to the complexities and information available for each individual case. Audits will end in either no change, agreed, or disagreed. With no change, the IRS reviews the items that were being audited and results in no change. For agreed, the IRS proposes changes and the taxpayer understands the changes and agrees with them. If you agree with the findings of the audit, you will be asked to sign the examination report and pay if any tax liability is owed. For disagreed, the IRS proposes changes and the taxpayer understands the changes, but disagrees with them. If you disagree with the findings you have the right to appeal.
If you receive a notice for an audit, you should not ignore it. If you do not reply within 30 days, the IRS can take action. The notice you receive will have all the information you need to know on it. This will include what is being reviewed, and the documents that you need to provide. You should organize your records and if anything is missing, get duplicates so your records are complete and accurate. If you receive a notice of Audit from the IRS, contact an experience IRS Tax Attorney who can help you through the process and obtain the best outcome.