The Break Down on Audits

The purpose of the audit is to determine that the tax return is substantially correct. At the end of the audit, one of three things are going to happen. Either you will owe the government money, the government will owe you money or the auditor will accept the tax return as originally filed.

How Common Are IRS Audits?

The likelihood that a taxpayer would be audited in that year was smaller for low- and middle-income filers and higher for those earning $200,000 or more. The IRS will contact you if there are discrepancies between your tax return and the paperwork it has received from your employers, brokerage firms and other sources. It may also initiate an examination if auditors spot certain red flags that could trigger a tax audit. Those may include failing to disclose taxable income, neglecting to report cryptocurrency transactions, making typos or using lots of round numbers.

What Is the Procedure for an IRS Audit?

The IRS can initiate three types of audits:

• Correspondence audit. Conducted via writing and not face to face with an auditor.
• Office audit. You’ll generally have to meet with an auditor in person. Expect to meet at an IRS office and for the experience to last between two and four hours.
• Field audit. The auditor may come to your place of business or records office. Expect this to last a day or longer.

Depending on the type of audit, the taxpayer or her representative will use different strategies to navigate it. The initial correspondence will often confirm which parts of your tax return are being questioned. When it comes to communicating with the auditor, only answer the questions you’re asked, whether it’s in an in-person audit or via written response. If you’ve hired a professional to help you navigate the audit, you will likely sign power of attorney, and you may never even speak to the auditor — your representative will do that for you.

How Far Back Can the IRS Audit?

The IRS can audit returns filed in the last three years, but if it identifies a substantial error, it may look back further, typically no more than six years. Therefore, it’s important to keep records and supporting tax stretching back at least three years. You may be asked to supply them during the audit.

On an end note, remember that you have rights when you’re being audited by the IRS. Those include the right to professional treatment by the IRS auditor and a right to representation. You also have a right to appeal within the IRS and the courts.