Filing tax every year can be confusing and complicated, and no one likes receiving red-letter notices from the IRS. Being audited is one step further. Receiving a notice of audit can be particularly scary and stressful for anyone, whether they believe that they have accurately filed their taxes or not. In this short article, we will walk you through the reasons behind tax audits, as well as considering some of the critical steps you need to take when you receive one of these feared audit notices.
Why Are You Being Audited?
First, let’s discuss why audits happen. An audit is simply an in-depth review of your submitted tax returns, bank accounts, and business. It is a tool used by the IRS to ensure you have reported your taxes properly. Often, as individuals, we aren’t expecting to be audited, so that it can come as quite a shock to the system receiving these notifications. Being audited, though, doesn’t necessarily mean you are a suspect of tax fraud or that there’s a problem with your tax return. Less than 1% of US tax returns are audited each year, and most are simply selected at random to give the IRS a broad sample.
Don’t Panic
The first moments after receiving a tax return audit notice can strike fear in the heart of anyone. It’s easy to start worrying about finding the appropriate help and paperwork; however, defending against a tax audit could be easily managed if you don’t panic. As we have already mentioned, many of us are simply audited at random, and it does not mean you are a suspect of a crime. Take a deep breath and follow the rest of these instructions carefully. Whether you have made a mistake or not on your taxes, you will be fine after working through the audit.
Read and Respond To Notices Quickly
Now we’re calm, and it’s time to reread the notice. There is a couple of different kind of audit notifications you can receive. Some simply require a bit of document matching, while others request a full audit. Regardless, almost all notices from the IRS will include a timeframe for which they need a response. Failure to do so could result in them coming down hard on you, which no one wants! Make sure you make a note of response times and always reply in a timely fashion.
Gather Required Paperwork
Now that you have digested the letter and understood exactly what they are asking of you, it’s time to get together all your tax paperwork. You may have receipts, bank statements, or invoices that you have used throughout the year. These are the same items you likely used in the first case to complete your tax return, alongside 1099s, K-1s, and W-2s. If you haven’t kept physical copies of them all, it’s time to make some. Remember, you can be audited at any time, so don’t throw any of this away.
Seek Professional Help
Gathering your paperwork is just the first step in the auditing process. They then need to be checked, re-checked, re-submitted, queried, or challenged against IRS questioning. All of this can be quite time-consuming, and the IRS isn’t afraid to try and break you if you make mistakes. This is why, when defending a tax audit, we recommend reaching out to a professional audit agent for help. The hired representation can help guide you through the process, whether your case is particularly complex or not. For peace of mind, or if in any doubt, seek representation.
Potential Outcomes
There are three outcomes possible from an audit. The first is “no change,” which means both you and the IRS agree everything submitted initially is accurate, and no further action is required. “Agreed” is the second outcome status. This says that the IRS did request changes, which you have agreed to. Finally, “disagreed” means that they proposed a change that you do not agree with. In this case, you will have to use your prior representation to help you file an appeal.
Follow these steps to get your audit dealt with swiftly and efficiently. Hopefully, you don’t end up having to pay any extra tax. Sadly, if you do, we recommend paying it quickly and moving on, away from the IRS’s constant letters. Either way, being audited is no fun but can be dealt with relatively painlessly if you follow this plan.