The number of IRS audits actually went down in 2015-of course that is of little comfort to the people coming into our tax law offices in San Diego, Orange County and Los Angeles. The tax agency expects to complete approximately 1-million audits this year—which is down almost 400,000 from just three years ago. The reason—budget cuts that have left the IRS with nearly 20% less than just five years ago. The number of IRS agents available to perform tax audits in 2014 is expected to be at its lowest number in over three decades.
But all the cutbacks does not mean you will not face an audit. In fact it is still one of the most common reasons our clients elect to consult a tax attorney. While the mere thought of a tax audit scares most people, with the right organization and preparation, you should have nothing to worry about—as long as you are not trying to cheat on your returns.
To help you prepare, here are some general guidelines. Just a note; this is not meant as legal advice. If you are facing an audit and would like specific help related to your case please call our offices and schedule a no-obligation review with one of our certified legal specialists.
Step One: Find Out Why You Were Chosen To Be Audited
If you have been selected for an audit, that does not necessarily mean that you have done anything wrong. There are several different ways that individual returns are selected for an audit, including:
• Random: It is the luck of the draw. A computer randomly selects returns for an audit, which can often involve a statistical formula that identifies returns that are out of the “normal” or “average” range.
• Document Mismatch: Oftentimes the simplest typo while entering information on your return could result in inaccurate information being submitted. This could include W-2 forms or 1099’s that are reported but do not match the information provided.
• Related/Partner Returns: Sometimes a return may be selected for audit when it includes transactions or other related issues with other taxpayers. This is usually due to business partners or investors returns already being audited.
Step Two: Determine What Type of Audit You Are Facing
There are three types of audits the IRS regularly performs. Depending on which type of audit, the process could end up being fairly painless. It is important to remember that ALL audits start with a letter. Thieves have been known to call taxpayers and impersonate IRS agents, claiming the taxpayer is being audited and demanding immediate payment. Do not fall for it. If you have not received an official letter from the IRS then you are not being audited.
This letter should tell you what kind of audit you are being scheduled for.
Correspondence audit (Form 566(CG)): This is by far the easiest IRS audit to deal with. Taxpayers will receive this type of notice when they forgot something simple such as a signature on their tax return or they may be asked to provide further explanation of something more specific, such as an itemized deduction.
In-office audit (Form 3572): These types of audits are generally sent to people who are self-employed or who own small businesses. The taxpayer will be required to go to the local IRS office to explain certain things on their tax return. These types of audits can generally take several hours, but are usually resolved on the day of the visit.
Field audit (Form 4564): These are the most comprehensive audits. IRS Field Representatives will be sent to your home or your place of business to conduct the examination. Expect it to be very intrusive. These are by far the most time consuming types of all the audits and can take multiple visits to resolve all of the issues involved.
Step Three: Know Your Legal Requirements
There are many laws to keep in mind when it comes to the retention of your personal and business financial records. For example, all business records regarding any particular asset should be kept for as long as you own that asset plus three years. Payroll records need to be kept for all personnel for at least six past years plus the current year.
When the IRS performs an audit it can also include returns filed within the last three years when they perform an audit. If agents find a significant error they can also include additional years but generally speaking the IRS will generally not go back further than six years.
Step Four: Gather the Necessary Documentation
Once you have identified the type of audit that is being performed, you can start preparing your documentation that you will need to provide. In its letter to you explaining why you are being audited, the IRS will also include a list of any specific documentation that it will need to review during the examination.
If you get in the habit of keeping all of your documentation together by tax year, any audit you may be hit with will be much easier to answer. Keep all of your supporting information along with a copy of your W-2’s or 1099’s and a copy of the return you submitted with the IRS together.
But what if you are like a lot of people and you have misplaced the information? If you have not kept the tidiest of records for the year that is being examined, go through your return very carefully and try to recollect the information that got you to those figures originally. Once you have identified where the figures came from, you can try to find them again. For example, medical expense documentation may be available via the medical office that treated you.
Having to recreate records this way will certainly take you longer to collect, so make sure you start gathering all of your required documents as early as possible.
Step Five: Obtain Professional Representation
In every case except for the most basic correspondence audit, you should consult with a certified legal tax professional. People who try to save money by doing it themselves often end up spending much more as a result of penalties and interest that accumulate. This is especially true for field audits where the wrong answers could force a company out of business and perhaps even open executives to criminal charges. Licensed tax professionals can review your case information and documentation and work directly with IRS agents to limit your exposure.
If you are facing an audit and you are not sure what your options are, contact or call RJS LAW today at (619) 595-1655. We have convenient locations in Los Angeles, Orange County and San Diego and our tax specialists will personally review your case and provide options.
While a tax audit can be extremely stressful, with a little advanced preparation, you will get through it with flying colors.
This blog post is not intended as legal advice and should be considered general information only. If you have tax or business related questions or if you have received any types of notices from either the IRS or the California Franchise Tax board, contact the tax professionals at RJS LAW today.
Our team constantly stays updated on the latest tax issues and we can help you sort through your options. We have convenient offices in Los Angeles, Orange County and San Diego and we can help. For a free consultation call us at (619) 595-1655.