Understanding An IRS Tax Audit

Facing the scariest 5-letter word in the English language.

Examining the IRS tax audit process

There are a lot of misconceptions about what an audit truly is and what to expect if you have to experience one. The IRS, according to their website (IRS.gov), defines an audit as “a review/examination of an organization’s or individual’s accounts and financial information to ensure information is being reported correctly, according to the tax laws, to verify the amount of tax reported is accurate”.

In a nutshell, this means that the government wants to talk to you about a discrepancy between their understanding of what you should have filed and what you actually reported on your tax return. However, in the interest of understanding the language of their description, let’s examine the definition one piece at a time.

“…A Review/Examination of an Organization’s or Individual’s Accounts and Financial Information…” (or, “How and Why You’ve Been Selected to Sweat Bullets”):

There are several reasons why you might receive a phone call or written notification that you’re being “examined” by the IRS. Perhaps the simplest explanation is that you have incorrectly – with or without your knowledge – filed your income and deductions, when compared to what your employer and/or bank filed with the IRS. In this case, the government has to clear up what is accurate and expects you to help them sort it out.

Another scenario that might warrant a review is mismatching information filed by you and a business partner, or investor in your company. This type of audit may actually originate with the other party, and you’re under scrutiny to either confirm or dismiss what was reported. This is considered a “related examination” and, provided what you’ve filed is accurate, you shouldn’t have much reason to worry.

Lastly, believe it or not, you may have just been selected at random – basically, the inverse of winning the lottery. In this instance, the IRS, using a statistical formula, has calculated that circumstances of your return may warrant an examination. This is at no fault to you or what you’ve reported; you’re just statistically unfortunate.

Fact: According to the 2010 Data Book released by the IRS, 1.1% of 142,823,105 individual income tax returns were audited in 2010.

Pop Quiz

True or false: If you make less than $100,000 in gross yearly income, you don’t really have to worry about being audited.

a) True

b) False

Reveal Answer

In the same 2010 data book, statistics show roughly 1/3 of those audited claimed an earned income tax credit, which is only available if you make less than $35,535 ($40,545 for married filing jointly).

b) False

Return to question

“…To Ensure Information is Being Reported Correctly, According to the Tax Laws…” (or, “Wearing Black is Optional When Dealing With the IRS”)

Is it a funeral or a party? Depending on what you have to bring to the table largely decides the outcome of your discussion with a representative from the IRS. If you’re not being audited by mail, you’ll be personally interviewed by a government official. This can be conducted at your home, place of business or even an IRS office. Prior to your meeting, you’ll be advised what records you’ll need to present (generally speaking, you’re expected to keep records that go back at least three years). The interviewer will ask specific questions about what you filed on your return and whether you can back up everything you submitted.

Remember, being audited does not automatically mean that you will have to pay back taxes or that you’ll be in trouble. It’s the old adage that a clear and innocent conscience fears nothing – as long as you’ve reported your income and deductions honestly, you may worry for nothing.

Fact: In 2013, the IRS reported revenue collected from all these audits was $9.8 billion.

In the event that you’ve made a legitimate mistake, you have the right to disagree with the assessment – or, if necessary, the right to representation.

“…To Verify the Amount of Tax Reported is Accurate…” (or, “It’s Better to Have a Parachute and Not Need It Than the Other Way Around”)

Once you receive an audit notification and the initial wave of panic recedes, review your records for honest mistakes. If you did knowingly falsify your return and you’re not completely surprised by government’s response, it’s an excellent idea to read your rights as a taxpayer on IRS.gov – for starters. There will be additional steps you should consider.

Similarly, if the IRS determines that you’ve made a mistake on your return and you want to contest it, you have options beyond simply knowing your rights. Consulting with a tax resolution company is definitely advisable, as they will not only go over your liberties but can argue your case directly with the IRS. You’ll need to provide all necessary documents, so they can present an intelligent argument on your behalf.

Ultimately, securing this type of representation may be essential in ensuring you get the most thorough resolution possible and, at the very least, are able to remove “audit” from your immediate vocabulary. If you’re facing any type of situation with the IRS and you have questions, call us to talk to a tax professional or complete the form to request help online.