What happens when you receive an Audit Notice from the IRS?
More than likely, your first instinct will be to panic. However, getting audited doesn’t always mean that an error was made on your tax returns. Returns are chosen for a few different reasons:
Most audits simply come from Document Matching. When you receive a W-2 form or a 1099, that information is also sent into your file at the IRS, ready to be matched. If you do not report that income on your return, the IRS computer will automatically spit out a notice recalculating your income and tax, along with a bill for that tax, plus penalties and interest.
When this happens, you must defend yourself and do some research to find out whether the IRS is correct. Many times they are correct about the oversight in reporting the income, but most of the time they are wrong in regard to the ways that it will increase your tax.
If you don’t have experience dealing with the IRS, you’ll need a Tax Professional to defend you. If you choose to defend yourself, you’ll most likely be paying far more to the IRS than you should—if you should be paying at all!
Some audits simply come from random selection. These audits come from statistical formulas. If you have outlandish deductions compared to your income, or if your deductions don’t make sense for the type of taxpayer you are (for example, if you have too many travel and entertainment expenses for your type of income), you have a high likelihood of being audited. This has happened less frequently lately, as the IRS’s operating budget has been cut by Congress. This can change, however.
More than likely, your first instinct will be to panic. However, getting audited doesn’t always mean that an error was made on your tax returns. Returns are chosen for a few different reasons:
Most audits simply come from Document Matching. When you receive a W-2 form or a 1099, that information is also sent into your file at the IRS, ready to be matched. If you do not report that income on your return, the IRS computer will automatically spit out a notice recalculating your income and tax, along with a bill for that tax, plus penalties and interest.
When this happens, you must defend yourself and do some research to find out whether the IRS is correct. Many times they are correct about the oversight in reporting the income, but most of the time they are wrong in regard to the ways that it will increase your tax.
If you don’t have experience dealing with the IRS, you’ll need a Tax Professional to defend you. If you choose to defend yourself, you’ll most likely be paying far more to the IRS than you should—if you should be paying at all!
Some audits simply come from random selection. These audits come from statistical formulas. If you have outlandish deductions compared to your income, or if your deductions don’t make sense for the type of taxpayer you are (for example, if you have too many travel and entertainment expenses for your type of income), you have a high likelihood of being audited. This has happened less frequently lately, as the IRS’s operating budget has been cut by Congress. This can change, however.
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Protect yourself by hiring an experienced Tax Professional.
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Another reason for being audited is due to Related Examinations. You may be selected for an audit if there are issues with other related taxpayers, like business partners or investors, whose returns were also selected for auditing.
In all cases, the IRS will notify you by mail if you’re being audited. Occasionally, you will receive a phone call with a confirmation notice in the mail, but you will never receive an email, since email notification is not used by the IRS.
There are numerous telephone scams which call taxpayers to tell them that they owe money to the IRS and are subject to lawsuit. Don’t fall for this. Report the phone number or caller to the IRS or legal authorities.
What do you do during the audit? Be honest, but be sure to only provide the information that they are asking of you, unless that information is evidence to lower your potential tax. Also, protect yourself by hiring an experienced professional in the audit area.
Remember, you have rights. You have the right to be represented by a Tax Professional, such as a CPA, Tax Attorney or Enrolled agent. You also have the right to privacy and confidentiality about tax matters. You have the right to know why the IRS is asking for information, how the IRS will use it, and what will happen in the event that you don’t provide the requested information.
In addition, you have the right to appeal a disagreement with the IRS findings, both within the IRS and before the courts. Most of all, you have the right to be treated professionally, courteously and fairly by the IRS employees.
If you have tax problems, you should protect yourself by hiring a qualified Tax Problem Specialist. If you have questions on this topic or any others, please don’t hesitate to give me a call or send me an email. I’d be happy to help you.
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