IRS Audits – Everything You Need to Know
The filing deadline has passed, and tax returns have been filed. Many
Americans have gone from worrying about getting their returns filed to worrying about hearing those dreaded words “IRS Audit.”
Even the thought of being audited strikes fear in most people’s hearts. So today, we will cover everything you need to know about being audited by the IRS.
What is an IRS Audit?
According to the IRS, an audit is a review or examination of an organization’s or individual’s accounts and financial information.
The IRS is looking to ensure the information has been reported correctly and verify that the reported tax amount is correct.
What causes an IRS Audit?
Each year the IRS chooses hundreds of thousands of tax returns to be audited. How do they choose those returns?
There are two ways tax returns are chosen to be audited:
- Random – The IRS randomly chooses tax returns to audit to check taxpayer compliance.
- Computerized Screening – This is an automated system that checks your returns to norms that the IRS has established. Certain “Red Flags” will trigger an audit. What are some examples of red flags that can trigger an audit?
- Failure to correctly report employees’ pay
- Math errors on your tax return
- Underreporting your income
- Making a home office deduction
- Cryptocurrency transactions
- Deducting a disproportionately large amount of business expenses
- Operating a cash-intensive business
- Showing repeated, unusually large losses (business, gambling, real estate)
- Consecutive years of unfiled returns
What are the three types of IRS Audits?
The IRS conducts three main types of audits:
1. Correspondence Audit – This is the most common type of audit. This audit will be conducted by mail. The audit notice will specify what the area in question is and include a request for additional information needed. For example, IRS Letter CP 2000 is a notice for a correspondence audit.
Caution: This audit requires you to communicate your legal position in writing. Always be careful of the legal consequences, and speak only through an attorney.
2. Office Audit – Because all statements made in person are considered sworn under oath, you should usually be represented by an attorney. In this case, the IRS will request you meet with an examiner at the local IRS office.
Your initial notification of this audit will still come by mail but will also include your examiner, their contact information, and a date and time for the meeting at the IRS office. The audit letter will also have a list of documentation for you to bring to the meeting.
3. Field Audit – This is the least common type of audit. It is also the most comprehensive. For this audit, an IRS examiner will visit your home or place of business. They will examine every aspect of your tax return and related business items.
For example, if you have a cost of goods sold or “COGS,” the auditor may count your store inventory. If you pay wages, the auditor may speak with your workers, drivers, etc.
Family-owned restaurants, trucking companies, manufacturers, and cannabis businesses commonly experience this type of audit.
How long does the IRS have to audit?
The general rule is that IRS can audit for three years after you file your return.
However, there are circumstances that can increase that number to six years and sometimes even forever.
For instance, if you omitted more than 25% of your income or omitted more than $5,000 in foreign income, the IRS now has six years to audit your return.
If you never file a return, the IRS has NO TIME LIMIT. The IRS can also audit your return forever if you didn’t file certain tax forms. Examples of those are Form 5471 if you own part of a foreign corporation or Form 8938 for overseas assets.
Do I need to hire a tax attorney if I’m being audited?
An audit, whether it is IRS or the State government, usually involves some legal questions. Depending on how well an individual or business is represented, an audit can often expose them to legal risk. We always recommend that because an IRS or state tax audit is a legal problem, it’s best to hire an attorney.
We recommend that you hire an attorney with a proven background in not just tax law but also tax procedure. Sometimes an audit is about more than making sure a tax item is properly deducted or reported on your tax return. Sometimes it is about whether there is a more serious legal issue and consequence involved.
We especially recommend hiring an attorney for the following types of audits:
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IRS Corporate Tax Audits – Especially for restaurants and businesses that handle large amounts of cash.
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State and Federal Payroll Tax Audits
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State Sales Tax Audits
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Employment Audits – Especially if the question is whether the companies’ workers are employees or independent contractors.
Video: Should Tax Law Offices Represent You for Your Audit?
At Tax Law Offices, we are experts in IRS tax law and procedure and specialize in complex IRS audits. If you are being audited, contact us today. We can help!
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