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In this article, we have collected the 20 most commonly asked questions about tax audits and briefly answered them for your reading pleasure. Explore our tax content to find in-depth information about each question.
Our website is filled with an in-depth discussion regarding specific dealings with the IRS. Sometimes, all one needs is a quick tip. Below is a list of the questions I am most frequently asked with regard to handling IRS audits.
IRS statistics show that individuals have a 1 in 90 chance of being audited each year. But the answer is much more complicated—the danger is higher for the self-employed and folks who make over $200,000 per year. If you are in one of those categories, the odds are at least 50-50 that you’ll hear from the IRS.
In writing, by U.S. mail. Occasionally someone saying they are an IRS auditor may call you first, but be skeptical. Tell them to send written notice and hang up. The IRS never uses email to notify you of an audit.
More than three-quarters of all audits are by mail. Typically, the IRS is asking for copies of things like bank and credit card statements, canceled checks, and real estate closing documents.
These are items you should have on hand or be able to get fairly easily. So there is no reason you can’t handle most mail audits on your own—assuming your tax return numbers weren’t fudged. If the IRS wants a face-to-face audit, at least talk to an experienced tax pro beforehand. Then decide whether or not to hire someone.
While it’s possible, it is highly unlikely. If the auditor uncovers criminal activity during an audit and the crime affects your taxes, you may be referred to the Criminal Investigation Division. In that case, the audit stops and an IRS special agent steps in. Strong advice: Run, don’t walk to a tax attorney’s office and don’t say another word to anyone.
Absolutely. In most cases, you can appeal to the audit report. And in all cases, you can contest the audit findings in U.S. Tax Court. Tax court is not as intimidating as it sounds, particularly if your tax bill is less than $50,000.
First, a little good news—1 in 8 taxpayers audited don’t owe anything and may even get a refund. For the rest, the audit bill for a correspondence audit averages about $6,600, and for a face-to-face audit, a shade over $20,000. Ouch. Moral: Keep good records and file tax returns you can back up in case the IRS ever calls.
Not really. Once you’ve gotten notice from the IRS, even dying won’t get an audit canceled. (Your estate or surviving spouse will have to fill in for you). Another version of the old saying about Death and Taxes: If you ignore an audit notice, the IRS will simply proceed without you, and you won’t be happy with the result.
A tax audit is a Show Me, the verification process of your income and deductions. The law requires you to provide proof and explanation of items listed (or that should have been) on your tax return. With a face-to-face audit, the IRS provides a list of things the auditor wants to see, like bank and credit card statements, asset sale papers, and other mostly financial items.
The IRS realizes this is often the case. So it usually allows a payment plan, but with setup fees, interest, and penalties. Or for folks really strapped financially, an Offer in Compromise or Chapter 13 repayment plan may work.
Well, Stuff Happens. In many cases, you are allowed to reconstruct missing records and offer explanations. There are various ways to do this, including under the Cohan Rule, which allows you to make reasonable estimates of expenses in certain circumstances.
Breathe easy. Usually, the IRS is limited to the most recent 3 years of your tax returns. However, in more serious cases of underreported income, the IRS can go back to the last six years of tax returns you filed or even further for outright tax fraud. My advice is to keep financial records for six years after you file a tax return.
Logically, the IRS can’t audit a return you didn’t file—but it can legally dummy up tax numbers for you. Chances are you won’t like the result. You may contest this as you would an audit by showing the IRS did not give you proper credits and deductions or overstated your income. The best thing to do is to prepare the missing tax return on your own.
Uh-oh. Of course, it will mean a tax bill. And, if the IRS finds “negligence” (a careless mistake) or “ tax fraud” (outright cheating) on your part, it can hit you with heavy penalties—from 20% to 75% of the tax due to the misdeed. In severe cases, you can be referred out for criminal prosecution.
No. Auditors’ powers to pry are not unlimited. Often you can “Just Say No” to an IRS fishing expedition. Typically auditors ask to see items that are unrelated to the year or years in the audit notice. Unless the auditor can show that the item is relevant to the audit, you don’t have to produce it.
Unless you are being mail-audited, you’ll be summoned to a local IRS office. Or, more likely, the auditor (called a revenue agent) will want to meet at your home, business, or tax pro’s office. The IRS wants to come to where your records are kept.
Count on it—especially if you are self-employed and file a Schedule C with your tax return. Your chances of an audit are lower if you are incorporated, a partnership, or a limited liability company, but if audited the IRS will want to inspect these business records as well as your own.
IRS lightning can strike more than once. Each year’s tax return is scored independently by the IRS computer for its “audit potential” and there are other ways to get picked too. So, you may be audited numerous times in your tax life … or never. It largely depends on an IRS computer. And, if a past audit turned out productive for the U.S. Treasury (bad for you), don’t be surprised to see more audits in your future.
You betcha. If you don’t cough them up voluntarily, the IRS can get your bank and other “third party” financial records during an audit using its summons power.
If you are asking this kind of question, see a tax attorney, before saying one word to an auditor.
No need to be a Nervous Nelly. The law allows you to avoid facing off with an auditor if you give someone your IRS Power of Attorney to go in your place. It largely depends on your comfort level.
Please, take your time to also visit our top 20 most asked questions about tax, in general.
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