Navigating the IRS Audit Process: What You Need to Know

What You Should Do If You Get an IRS Tax Audit Notice

If you get a notice that the IRS is planning to audit, then they’ll contact you by mail or telephone and NOT by email.

Remember, don’t get bent out of shape as this does NOT mean you’ve done anything wrong.

Make sure you read through the entire notice and follow their instructions carefully as you have 30 days to respond to an audit notice.

Typically the notice will inform you:

• why you’re being audited in the first place
• what you’re being audited for
• how you’re being audited

For example, if you’re facing a correspondence audit (via mail), provide the documentation the Internal Revenue Service is requesting + answer all of their questions regarding your return.

On the other hand, if you’re facing a field audit (in-person audit), It’d be wise to get in touch with your CPA that prepared the return in question. It’d also be a good idea to seek legal advice with a tax attorney.

The notice will also contain the specific information to be examined and what supplementary documents you may need to present.

You’ll want to provide them with copies and not the originals. Before the audit, get all paperwork organized and the documents you plan on submitting pertain to the year that is under audit.

According to data, there’s two types of taxpayers that are more likely to face a tax audit:

• the rich
• the poor

Let me explain…

In the past, IRS audit trends tend to vary by income groups. Those with incomes below $25,000 (poor) have an audit rate of 0.69% which is more than 50% higher than the overall audit rate.

Higher-income taxpayers (i.e $500,000+/yr) also have a higher-than-average audit rate.

But overall tax audit rates have declined across all income levels especially for taxpayers with incomes of $200,000 or more.

Who Gets Audited the Least by the IRS?

Research shows that middle-income Americans with annual incomes of $100k – $200k are least likely to face an audit.

They tend to have a lower audit rate (0.44%) due to their returns have less room for error as they likely are W2 employees. Most rely more on the standard deduction rather than itemizing which cuts out the potential for being too aggressive with deductions.

How Long Does a Tax Audit Take?

Generally the entire audit period generally shouldn’t take more than 5-6 months to complete. Occasionally, they can be resolved quicker if you are well prepared.

On the other hand, there are a handful of factors than can prolong the audit such as:

• you’re a small business owner or independent contractor
• there are many changes that need to be made on your return
• IRS pursues penalties
• you don’t agree with the audit results

Overall, the IRS audit timeline is 26 months after the due date of the tax return or the date it was filed, whichever is later.

What Does the IRS Look For During an Audit?

There are several reasons why someone may get audited but the IRS mainly looks for potential tax revenue that was not reported on their tax returns.

This comes in 2 forms:

#1. Income was understated

#2. Deductions were overstated

Because the IRS does not have the resources to audit everyone’s return, it therefore sets priorities based on certain factors about the information reported in the return and the person who filed it.

What Are Some of the IRS Audit Penalties?

The IRS imposes a wide variety penalties (fees or criminal repercussions) on taxpayers who’ve made mistakes on their tax return or have unpaid taxes because they didn’t file their taxes.

Here’s a list of some of the penalties from the IRS:

• Information Return applies to taxpayers who don’t file or furnish their required information return or payee statement correctly by the due date.
• Failure to File applies when you don’t file your tax return by the due date.
• Failure to Pay applies when you don’t pay the tax you owe by the due date.
• Accuracy-Related applies when you don’t claim all your income or when you claim deductions or credits for which you don’t qualify.
• Failure to Deposit applies when you don’t pay employment taxes accurately or on time.
• Tax Preparer Penalties apply to tax return preparers who engage in misconduct.
• Dishonored Checks applies when your bank doesn’t honor your check or other form of payment.
• Underpayment of Estimated Tax by Corporations applies when you don’t pay estimated tax accurately or on time for a corporation.
• Underpayment of Estimated Tax by Individuals applies when you don’t pay estimated tax accurately or on time as an individual.
• International Information Reporting applies to certain taxpayers who fail to timely and correctly report foreign sourced financial activity.

The amount you’d owe in penalties will vary depending on:

• your income
• discrepancy between returns
• other factors

Are You Facing an Audit?

Trying to deal with an IRS audit on your own can be terrifying. Whether you’re facing an audit or if the IRS has issued penalties on your return then consider contacting a professional for tax advice. Many times an experienced tax lawyer can save you from the fines and penalties associated with an audit.