IRS Audit Knockout-Round 3 of Audit Questions
What questions does the IRS ask during an audit? This list expands on the audit questions covered earlier.
The “Round 3” questions are more serious. The IRS will ask probing questions about sources of income. The auditor will analyze (in great detail) whether your lifestyle truly fits what you reported on your tax return.
Question #1 – Where Do You Bank?
Why does the IRS ask this question? IRS asks this question because they will request access to your bank statements.
If you do not provide your bank statements, IRS will request them directly from your bank. (And YES, your bank will gladly provide the statements!)
Often, IRS already knows where you bank. How does IRS have this information?
- Maybe you received a refund that was forwarded directly to your bank. Your bank account and routing number are on your tax return.
- If you have earned interest on your savings, the bank paying the interest reported it to IRS on Form 1099. The IRS knows people often keep their savings at the same place where they also have their other checking accounts.
- Sometimes your banking relationships also appear on your credit profile. (Yes, IRS can get that too!)
Another reason IRS asks this question is that they are looking for fraudulent behavior. Many people bank in multiple places. The auditor is looking for whether you will be completely truthful. Of course, IRS wants the information, but there is a deeper reason for the question.
Remember, there are analytic or procedural reasons for EVERY question IRS asks.
Question # 2 – How Were Your Deposits Made?
If you are not self-employed or the owner of a business, then the answer is relatively simple. You may have a direct deposit. Or possibly receive a check which gets cashed at a bank. Occasionally there are people who bank at a currency exchange or a check-cashing establishment. Sometimes people don’t use banks at all.
The auditor asks this question because IRS is checking for unreported income. They want to know who makes the deposits and how those deposits are made. IRS is looking at what your pattern is to determine the likelihood you have other income.
Question #3 – Do You Have Any Other Income Generating Activities?
The gig or “side hustle” economy continues to grow with no signs of slowing down. People can now use Third-Party Payment Processors to take payments for goods, services, or even just by request. The government has placed new reporting requirements on companies like CashApp and Venmo. In addition, companies like Uber and DoorDash have made it even easier for people to earn additional income.
If you participated in any activity that resulted in additional income, hopefully, you reported it on your tax return. You will have to explain your reasoning to IRS if you did not.
This question speaks for itself. Again, the auditor is looking for unreported income.
Question #4 – Do You Own or Trade in Cryptocurrency?
Cryptocurrency is a relatively new trend that many people have taken part in. IRS wants details of your Cryptocurrency transactions.
Now, there is a YES/NO question on your tax return about whether you participated in any Cryptocurrency transactions. If you traded in Cryptocurrency and did not correctly state your participation on your return, then according to IRS, you have filed a false tax return.
Maybe it was a mistake. Perhaps you simply overlooked the question. It’s important to know that the question is there. But also, you should know that now IRS confirms your answer.
IRS will also require a history of your transactions. Again, this line of questioning all relates back to unreported income.
See this SPECIAL VIDEO: Can You Hide from the IRS in Another Country?
Question # 5 – Did you Barter?
Another question IRS will ask is whether you have bartered. Bartering is when you trade service for another service. (For instance, you work as a Heating and Cooling repairman, and you trade your services with a Dentist who will provide your family’s dental care.)
That trade counts as income. If you didn’t put it on our tax return, it is unreported income.
Question # 6 – Do You Gamble?
This question is also part of the IRS’s cash analysis. There are two reasons IRS asks this question:
- The auditor is looking at whether your gambling activity is a significant part of your income.
- If you are assessed more tax after the audit, IRS may determine you would have a greater ability to pay the tax owed if you weren’t gambling.
NOTE: Gambling winnings could result in additional state tax because most states will not allow you to offset your winnings with losses. Therefore, you get state-taxed on just the winnings. But at least gamblers often settle with the state if that happens.
Question # 7 – Did You Receive any Loans or Gifts?
There is a really important reason why IRS asks this question.
IRS will analyze your bank account. If they see an unusually large deposit, they will have questions. Who issued that loan? Who made that gift?
IRS won’t just ask the question; they will confirm your answer with the source. If the money came from a loan, IRS will request a copy of the loan application. That application will give in-depth information to the IRS that you may not have planned on providing.
Hopefully, the information on the loan application is consistent with your tax return, and with the answers, you have provided the auditor. If any answers are different, you need a lawyer for this serious legal problem.
Never forget: All of the IRS questions are interconnected with other questions. And there are procedural and analytic reasons for EVERY question asked during an audit.
We hope that you find this information helpful.
If you are being audited and think you need professional help – Contact Tax Law Offices today!