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Being Audited: What Does an IRS Audit Involve?

Being Audited: What Does an IRS Audit Involve?

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The holidays are long gone and you’ve jumped into a new calendar year. That can only mean one thing: tax season is officially upon us.

Possibly the only word that people and businesses dreading to hear more than “taxes” is the words “IRS audit.” Sounds pretty serious, doesn’t it? 

There are several reasons that the IRS will choose to audit you, such as improper data entry, filing under the wrong status or income that wasn’t reported.

While this process is overwhelming for all, you can ease the stress by knowing what to expect.

Here are some details on the IRS audit process and what you should look out for.

Reasons for an Audit

Not many people realize that currently, the IRS is significantly understaffed and underfunded. You probably didn’t think that was possible, but they’ve undergone their fair share of adversity the past several years.

Because of that, the IRS is simply looking for fair reports from every American. 

They don’t have the headcount, or even the desire, to come knocking at your door looking for every cent that you owe them.

However, there are several mistakes you can make when filing taxes that’ll lead to the IRS reaching out to you for an audit. If that happens, then you only have yourself to blame.

These reasons include things like filing under the incorrect filing status, not reporting all of your income, data entry errors you may have, and claiming false dependents.

Even though you making these slip-ups might be an honest mistake, there are those out there who perform these “mistakes” on purpose for personal gain.

Because of that, the IRS has to perform audits when they feel something isn’t adding up. When that happens, they’ll take action to do so.

Letter in the Mail

The entire IRS audit process will begin with them notifying you of their intent to examine your income further. That comes in the form of a letter sent to your residency.

The letter will also inform you whether you’ll be going through a correspondence audit, field audit, or office audit (more information on all three in a minute).

One important thing to note: the IRS will never contact you by phone. Many people receive scam calls claiming to be the IRS, but they’re not. If the IRS has a bone to pick with your taxes, they’ll send you a letter in the mail to inform you.

Types of Audits

As previously mentioned, the IRS will inform you of one of three audits they intend to perform to examine your filings further.

See below for a brief summary of each and what you can expect when going through their processes.

Office Audit

Office audits are done by you coming to the IRS. You’ll be instructed to schedule an appointment at a nearby IRS office.

You’ll be meeting with one of their appointed revenue agents and/or tax compliance officers.

This form of audit is typically done for the tax returns that are far less extensive than a normal tax return. Simply comply with their instructions and bring all proper documentation to expedite the process.

Field Audit

This is the type of audit that business owners fear most. Not only will you be undergoing an IRS audit, but they’ll also be visiting your offices.

That means prioritizing your day to give them a quiet place to work, conduct interviews, and give them a tour of the business. You’ll also need to provide them with any and all documentation they may request.

Looking to avoid this for your business at all costs? Who isn’t? Line yourself up with a trusted corporate bookkeeping service and never have your taxes questioned.

Correspondence Audit

A correspondence audit is the only type of audit that doesn’t require an in-person interview of some sort. 

The entire auditing process for a correspondence audit is performed through the mail. They request further documentation from you, which you’ll then fill out or provide copies of, then send it back to them.

This process will be as lengthy or as quick as the IRS sees fit until they have a better understanding of your finances.

Audit Report

After you’ve complied with the audit process and the auditors feel as if they have a firm understanding of your finances, the IRS audit process is nearly complete.

Once it’s all said and done, the IRS will issue a Revenue Agent Report (RAR), which is filled out on an IRS form 4549.

This form will give you an in-depth look at what the IRS auditor(s) found. More importantly, it’ll also include their proposed tax changes and the reasoning behind it.

If you owe any additional tax after the report is completed, that’ll also be spelled out on the RAR.

It may end up that you either don’t owe any money at all or even receive money back after the audit is said and done.

Best Way to Avoid an IRS Audit: Hire a Professional to Do Your Taxes

The best way to increase your chances of never going through an IRS audit will always be by hiring a professional to do your taxes.

Simply put, they know the process better than you do. They can properly file your revenue and include all necessary tax write-offs and deductions as well.

Be sure to read this article on 5 reasons why you should hire someone to do your taxes in 2020.

For more inquiries, please reach out via our contact us page and we’ll be happy to discuss things with you further.

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