What Happens When You Get Audited?
An audit by the IRS is pretty much everyone’s worst financial nightmare. The typical taxpayer dreads having an IRS agent delve deeply into their finances – even if they’ve done nothing wrong.
Who knows – you may have been randomly selected, or you may have accidentally raised some internal red flags in the IRS system. The bottom line is – you do not want to be audited, if you can at all help it.
But what happens when you get audited? We’re here to walk you through an IRS audit, what type of audit you might be facing, how the IRS office handles the auditing process – and even more additional information.
What Is An Audit?
While the process is more technical, for ease of explanation, you can think of an IRS audit as a deep dive into all of your financial transactions. And we do mean a deep dive.
The IRS operates under the assumption that anyone being audited may be hiding something – which can be maddening, if you filed an honest tax return. The job of an IRS manager is often to catch criminals, so it may feel like they are treating you as one, even if you’re not.
Of course, making a substantial error on your tax return is the fastest way to get an in-person audit – though many deep dives are now office audits. A field audit is done at your home, your place of business, or even your home office.
This is the type of audit that most people are thinking of, when they conjure up the image of the IRS performing an autopsy on their financials. The IRS will use your legally filed contact information to notify you of an audit, and will request your full cooperation.
How Do I Know If I’m Being Audited?
You will be notified by mail. This will come directly from the IRS, and it will be a very clear, official government letter.
Why Am I Being Audited?
You can be selected at random, you could have made a substantial error on your tax return, you could have raised internal red flags at the IRS – or your business partner(s) may have suspicious looking tax returns. There is no one set reason (or rule) for being selected for an audit by the IRS, unfortunately.
What Do I Need To Show For An Audit?
In short – as much as you can. The most common issue for those facing an audit, is that they claimed deductions.
The IRS is wary of too many deductions (or large dollar amounts being deducted), as this is one of the biggest areas to attempt to hide fraudulent financial actions. A common tax ploy is to claim deductions for things that aren’t appropriate, or never happened.
Interestingly, over 3/4 of audits are done only by mail. These are called correspondence audits.
Other Factors To Consider (For An IRS Audit)
Usually the goal of an audit is to get you to pay additional tax – which you may have avoided either on purpose, or accidentally. Tax laws are notoriously complex, which is why we always recommend having your tax preparation done by someone who is a qualified tax professional – not software.
A tax preparer will know what is truly deductible (and what is not), and you will be much more likely to avoid an audit notice, this way. A self e-file can be a time-saver – but not if you end up owing money, instead of getting a tax refund.
There is a statute of limitations on how long the IRS can do an audit – but it’s not the kind of thing you want to find out about, first-hand. Plus, they are the ones who set the rules – so they can easily adjust the statute of limitations if they so desire.
Make sure you have an accurate return for every tax year, and also make sure you have an enrolled agent who can professionally preparer your tax return for you. An amended return is another way to correct any mistakes you make, usually in the case of qualifying deductions.
If you have a business partner, make sure that their taxes are in order, as well. A tax audit for them can lead to a tax audit for you – even if you’ve done everything properly.
And of course, our standard disclaimer – the IRS is always the bottom line when it comes to your tax bill – as well as tax deductions. Tax software may be quick and easy – but it isn’t always accurate about what is (and is not) taxable income.
The Bottom Line On Being Audited By The IRS
While being audited may seem scary – the truth is, it’s not so bad. You should always keep detailed financial records (just in case), and you should also never claim false deductions on any of your tax returns.
Always make sure you know who you are getting into business with, as well. An IRS agent may not believe you, if you claim ignorance of your business partner’s activities – so it’s better to err on the side of caution, when it comes to intertwined business transactions.
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