Last year, the IRS processed over 134 million tax returns. Of those returns, only one million were selected for an audit. Your chances of being selected are slim, but everyone is at risk of an audit. Audits are time-consuming and stressful, and many people don’t know how to proceed.
If you’ve been selected, here’s everything you need to know about tax audits and what you should do next.
What is a tax audit?
An IRS audit is an examination of your financial information to ensure everything is accurate. It’s not just your most recent return that’s at risk of an audit; the IRS can audit tax returns filed within the past three years. That’s why it’s so important to hold on to all documentation or forms you used to prepare your returns for three years or more.
Being chosen doesn’t always mean there’s an issue. Although there are some cases where a tax return would be selected because of a problem, the IRS chooses many returns at random. The IRS uses a statistical formula that compares your return against norms for similar returns. If your return shows an anomaly, an auditor will review your forms.
If everything looks good, the IRS accepts the return and moves on. However, if the auditor finds a problem, they will notify you through the mail that you are undergoing an audit and will request information about select areas of your return.
How to handle an audit
If you receive an audit notification, don’t panic. If you take the time to prepare, you’ll be able to get through it smoothly.
There are two types of audits: correspondence audit or in-person audit. A correspondence audit is very simple and straightforward. Usually, a correspondence audit occurs when the IRS finds a small error that can be resolved through the mail.
An in-person audit is more rigorous. You have the option of attending an in-person audit yourself, bringing a tax professional with you, or sending a tax professional to represent you. No matter which option you choose, there are some basic steps you should take beforehand:
1. Get organized: In your notification, the IRS will request you to provide additional documentation, such as bank records or receipts.
2. Provide only what was requested: You might be tempted to bring tons of documentation to show you have nothing to hide, but bringing more than what was requested can only do you harm. Instead, bring only the documents the IRS asked you to provide.
3. Answer succinctly: Similarly, answer questions honestly and succinctly. Don’t provide additional information; simply answer the question and move on.
4. Make copies of everything you submit: Don’t give the IRS auditors any originals. Make copies of all of the documentation and give them the copy and hold on to the original for your records.
After sending your information in the mail or meeting in-person, the IRS can end the audit in one of three ways:
1. No changes: If you proved the accuracy of all of the items under review, the IRS will close the audit without making changes to your tax return or tax bill.
2. Agreement: With this option, the IRS shares proposed changes and you agree with their changes.
3. Disagreement: If the IRS proposes changes, but you disagree, you enter disagreement. When that happens, you can request a meeting with an IRS manager, a mediator, or file an appeal.
If the auditors determine that you owe the IRS money, they will initiate the IRS Collection Process. The IRS will send you a bill with the amount owed, plus interest and penalties. If you don’t make payments, the IRS can send you into collections.
If you don’t have the money to pay off the bill right now, you still have options. You can set up an installment agreement and spread your payments out over months or even years.
Preparing your taxes
Although an audit is serious, it’s not something to stress over. If you keep good records and remain calm, you’ll be able to get through it without going broke or losing sleep.
If you haven’t filed your taxes yet and are worried about doing them yourself, there’s still time to prepare your tax return with an online tax service.
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