What to do when the IRS issues an audit
Sometimes it’s a good thing when someone singles you out. It feels good when your boss gives you a raise, a client chooses your proposal or an attractive person asks you on a date. However, when the Internal Revenue Service chooses to audit you, this may not feel so good. In fact, you may feel a little nervous.
If the IRS has scheduled an audit, you should have received a letter in the mail. The letter informed you of specific mistakes that your tax return contained. The letter may also give instruction for you to respond or information about your audit appointment. You may be tempted to ignore the letter or throw it away. However, if you do not respond within 30 days, the IRS may impose a fine or even launch an investigation.
The real story about audits
Audits are not always as ominous as the movies portray. A random, computer-generated selection triggers most audits. The errors auditors see in these tax returns often require a simple fix which you can do by submitting copies of receipts, canceled checks or other documentation as requested. This is called a correspondence audit.
If you make $200,000 a year or less, the chances that the IRS will audit you are about 1 percent. However, even for those making a moderate income, there are some factors that may draw the tax man’s attention:
- Your W-2s and 1099s don’t match.
- You reported conspicuous or improbable charitable donations.
- You reported suspicious business expenses.
- The IRS is auditing someone associated with you, such as a business partner.
If your annual salary is more than $1 million or you run a corporation, the IRS may closely scrutinize your use of tax shelters making you more susceptible to audits.
When things get serious
In cases where the correspondence audit does not resolve the error on your tax return, you may be required to submit to a more intense examination. For example, you may receive a letter ordering you to come to an IRS office in Nevada for an interview audit. An agent may come to your house or place of business for a field audit.
These types of in-person examinations happen only about 22 percent of the time. Most issues are resolved through correspondence. Tax payers are encouraged to hold on to their returns and documents for three years because an auditor is likely to look that far back when doing an audit.
The penalties and your rights
The IRS does not want you to go to jail; they just want their money. If an audit reveals that you underpaid your taxes due to negligence or overlooking IRS rules, they will likely impose a fine of 20 percent. People who commit fraud to avoid their taxes may pay a penalty of 75 percent. Only those who evade their taxes in the most extreme manner end up going to prison.
You have every right to consult an attorney as soon as you receive your audit letter. Your attorney will advise you about the documentation you should and should not submit and how to minimize the scope of the audit. He or she will also represent you during the interview or field audit by speaking on your behalf. Having legal counsel will ensure that you understand your rights and that those rights are not violated during the audit.