What to Do If the IRS Says They Intend to Audit You
IRS audit. Two words that no one particularly likes to hear, especially when they are used together. If you have received notice that the IRS is planning to audit you, what should you do?
Here are two important tips to keep in mind if the IRS puts you under their proverbial microscope.
1. Don't panic, unless you have reason to.
An audit brings to mind the image of a face-to-face meeting with a strict and unflappable agent of the government in a blue suit and a white collar with enough starch to cook an egg on. Those days are gone, if they were ever here to begin with.
If you have claimed all allowable credits, took deductions where you were entitled, kept logs and proof of your business expenses, and did not '‹Å"stretch' any of the items on your tax return , you have nothing to worry about. You may still have made an error, but there was no willful intent to defraud.
On the other hand, if you intentionally made claims for certain items or decided to attempt to defeat your rightful tax obligation, then you could also be faced with civil penalties on top of any other tax and interest you now owe.
For a little light reading on this subject, or if you are considering giving attention to any of the myriads of un-taxing schemes out there, please review the IRS publication The Truth About Frivolous Tax Arguments.
2. Most IRS audits are done via paper.
There are two main branches of the Service that perform paper audits: Examination and the Automated Underreporter Unit. Both of these branches perform their audits via correspondence.
The Examination branch of the IRS reviews returns for potential errors that deal with most items claimed on a tax return. A taxpayer's filing status, the number of dependents listed, credits that have been claimed and deductions that may appear on certain schedules all fall under the purview of Examination.
If Examination sends a letter, it may just be to request additional information to support one of these entries on the tax return. For example, if a taxpayer is denied the Earned Income Tax Credit, then before they can file for the credit again, they must complete Form 8862, Information to Claim Earned Income Credit After Disallowance. If the form is not attached to the original return, Examination may send a letter requesting it.
The Automated Underreporter Unit checks tax returns to ensure all income has been reported. This document matching process reviews all income reported on a tax return to the documents reported to the IRS by all payers. Income that is not reported, or underreported, gets assessed and a Notice of Deficiency is then sent out.
A taxpayer then has the option to agree to the additional tax balance, and to choose a repayment option, or to disagree, in which case they must send in substantiation that supports the discrepancy.
The IRS has three years to review all reported income. For this reason, be sure that you have included all income sources. If you haven't, immediately amend your tax return using Form 1040-X, even if a number of years has already passed. If you wait until the IRS makes the change, you will have cost yourself much more in penalties and interest.
For more information, see the links below.
Here are two important tips to keep in mind if the IRS puts you under their proverbial microscope.
1. Don't panic, unless you have reason to.
An audit brings to mind the image of a face-to-face meeting with a strict and unflappable agent of the government in a blue suit and a white collar with enough starch to cook an egg on. Those days are gone, if they were ever here to begin with.
If you have claimed all allowable credits, took deductions where you were entitled, kept logs and proof of your business expenses, and did not '‹Å"stretch' any of the items on your tax return , you have nothing to worry about. You may still have made an error, but there was no willful intent to defraud.
On the other hand, if you intentionally made claims for certain items or decided to attempt to defeat your rightful tax obligation, then you could also be faced with civil penalties on top of any other tax and interest you now owe.
For a little light reading on this subject, or if you are considering giving attention to any of the myriads of un-taxing schemes out there, please review the IRS publication The Truth About Frivolous Tax Arguments.
2. Most IRS audits are done via paper.
There are two main branches of the Service that perform paper audits: Examination and the Automated Underreporter Unit. Both of these branches perform their audits via correspondence.
The Examination branch of the IRS reviews returns for potential errors that deal with most items claimed on a tax return. A taxpayer's filing status, the number of dependents listed, credits that have been claimed and deductions that may appear on certain schedules all fall under the purview of Examination.
If Examination sends a letter, it may just be to request additional information to support one of these entries on the tax return. For example, if a taxpayer is denied the Earned Income Tax Credit, then before they can file for the credit again, they must complete Form 8862, Information to Claim Earned Income Credit After Disallowance. If the form is not attached to the original return, Examination may send a letter requesting it.
The Automated Underreporter Unit checks tax returns to ensure all income has been reported. This document matching process reviews all income reported on a tax return to the documents reported to the IRS by all payers. Income that is not reported, or underreported, gets assessed and a Notice of Deficiency is then sent out.
A taxpayer then has the option to agree to the additional tax balance, and to choose a repayment option, or to disagree, in which case they must send in substantiation that supports the discrepancy.
The IRS has three years to review all reported income. For this reason, be sure that you have included all income sources. If you haven't, immediately amend your tax return using Form 1040-X, even if a number of years has already passed. If you wait until the IRS makes the change, you will have cost yourself much more in penalties and interest.
For more information, see the links below.
More from this Contributor:
How to avoid being audited by the IRS
How to appeal an IRS notice
Do I qualify for the Earned Income Tax Credit?
Published by James Skye - Featured Contributor in Business & Finance
As a 15-year IRS employee with a strong freelance background, my education and experience affords me the opportunity to contribute articles relating to personal finances and taxes. I also enjoy writing relig... View profile
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