An IRS audit is a review of a business or individual’s tax return to ensure that everything was reported correctly in compliance with applicable tax laws. By law, the taxpayer is only required to pay the exact amount of tax owed, no less and no more. Consequently, if a taxpayer incorrectly reports his or her earnings, he or she will either be subject to additional tax owed or even receive a refund if applicable.
There are many reasons and methods the IRS uses to select a particular return for audit. Most often, a return is randomly selected by a computer. Other times, the IRS will have documents on file that do not match what the taxpayer reported on his or her return. When a taxpayer is selected for audit, he or she will be notified either by mail or by telephone.
An audit can happen by mail or in-person. If it is by mail, the taxpayer will receive a notice either requesting additional documentation or simply stating the changes to the tax liability. An in-person audit may be conducted at the IRS agent’s office or at the home of the taxpayer. The IRS will tell you exactly what documents it wants to review and will often conduct an interview.
The length of an audit varies depending on the complexity and availability of the items being disputed. Also, if there are substantial issues with the particular year being audited, the agent may be inclined to audit additional years as well. For this reason, it is very important to retain proper records and keep information used to prepare your return. Generally, it is recommended to keep these records for three years, but it is a good idea to keep them for longer.
Upon conclusion of the audit, there are three things that can happen. First, you may have been able to substantiate all of the items questioned by the auditor; therefore, there is no change to your tax return or liability. If the auditor does makes changes, you can either agree or disagree with the changes. If you agree with the changes, you will sign the form and accept responsibility for the new tax liability. If you disagree, then you can either set up a conference with a manager to discuss the items further, or file a formal appeal.
While an audit may be intimidating, the taxpayer has rights. For example, the taxpayer has a right to professional and courteous treatment by the IRS, a right to representation, and a right to appeal. A list of taxpayer rights can be found in IRS Publication 1. It is important that the taxpayer know their rights and take advantage of every opportunity to exercise those rights. If you or someone you know is selected for an audit, you should seek out professional representation to act on your behalf and secure your rights.
Please keep in mind the information and advice presented in this blog is not intended to be used as formal legal advice. Contact a tax professional for personalized tax advice pertaining to your specific situation. While we try and answer all parts of the question when we write our blogs, sometimes there may be some left unanswered. If you have any questions about your problems with the IRS, SBOE, FTB, or BOE, or tax law in general, call RJS Law at (619) 595-1655.