What does it mean to be audited? Well, according to the most recent data from the U.S. Internal Revenue Service, Americans owed over $114 billion in back taxes, penalties, and interest in 2020. And audits provide a means for the Internal Revenue Service and other government agencies to ensure that taxpayers are complying with the current law and paying their fair share of taxes by performing a deeper review of an individual or business’ past tax return.
Why Would a Taxpayer Get Audited?
Most audits are performed on a taxpayer due to an irregular line item in a tax return that might appear unusual or outside of the normal range of income and/or deductions.
As we have discussed in an earlier article, there are many reasons why an audit will be performed. In general, the chances of being audited increases depending on factors such as your income, the types of deductions or losses you claimed, the type of business you run and whether you own foreign assets.
How will you know if you are Being Audited?
Once there is a determination that an audit is needed, the IRS will assign that audit to an examiner. At that point, the IRS will contact you regarding an audit by letter. They will never initiate contact with you by phone. Be cautious of any unexpected phone calls that come from someone identifying themselves as an IRS agent.
When you receive a letter from the IRS regarding an audit, it will clearly list your full name, taxpayer/SS ID number, form number, IRS employee ID number, and IRS contact information. This letter should clearly identify the primary reason for the audit and what documents you will be expected to provide.
How is an Audit Conducted?
An audit is a process by which an auditor checks the books of a company or organization. The auditor typically checks the accuracy of records, reports, and transactions over a certain period of time. This can be done for various reasons, such as to determine whether money is being spent appropriately or if someone has been stealing from the company.
The IRS may perform an audit on your tax return if you have discrepancies in your information. They might also do this if they suspect that you are not reporting all of your income. If you don’t file your taxes correctly, the IRS will send you a letter with instructions on how to make corrections before they do an audit.
There are 3 Types of audits
- Correspondence Audit – The first and most common type of tax audit, correspondence audits comprise roughly 75% of all IRS audits. This is the simplest type of audit and involves the IRS sending a letter in the mail requesting more information about one or more items of your tax return.
- Office Audit – If an audit involves more issues or more complex issues, the taxpayer may receive a letter requesting that they come into a local IRS to review the questions in person. Because the questions and conversations can go into multiple directions, some taxpayers may accidentally say something that causes the IRS examiner to expand the scope of the audit. It may be to the taxpayer’s benefit to seek legal representation in this type of meeting.
- Field Audit – This type of audit is definitely one of the most intrusive of audits. This involves an IRS field agent coming to your home and/or place of business to examine records and documents. If the return includes business taxes, often the field agent(s) have specific knowledge of the industry that will help them to gain a better understanding of what should be expected. A field audit can take several days to complete, and could involve employee interviews and business facility tours. A taxpayer who is the subject of his type of audit should have a tax lawyer on his side to help navigate the audit process and help to contain the scope.
What Happens If You Don’t Respond to an Audit Letter?
The answer is, the Internal Revenue Service will make changes to your return based on information or educated guesses, and will send you a bill, and then a demand notice for payment.
Never ignore any correspondence related to the Internal Revenue Service wanting to examine or audit your tax return.
Why Legal Representation is Critical
Due to most taxpayers’ lack of experience dealing with the IRS, individuals have a tendency to provide too much information to IRS Agents, which may ultimately put them in harm’s way.
It is always a wise decision to bring in a tax attorney to assist in resolving an audit. A tax attorney will provide only the limited requested information to the agent/auditor in an organized manner, which limits the amount of information that is exposed to IRS scrutiny.
If you are facing an audit in the State of Georgia, contact our offices to learn more about the process and how we can help.