July 27, 2020

How to Prepare for an IRS Audit | Audit by the IRS, What to Expect | Legacy Tax & Resolution Services

Share this article...

How to Prepare for an IRS Audit | Audit by the IRS, What to Expect | Legacy Tax & Resolution Services

An IRS audit is a review or examination of an organization's or individual's returns and supporting information to ensure information is reported correctly according to the tax laws and to verify the reported amount of tax is correct. In most cases, an audit must be completed within three years of the tax filing date, so it’s important to save your tax records for at least that long. The IRS may go back further if your audit involves understatement of income or fraud.

You may be audited either through correspondence or in person with an IRS representative. In most cases, the process takes at least a few months. You have the right to request a delay while you gather the appropriate documents. Avoid providing tax and financial documents that do not relate directly to the audit.

An audit is an examination of tax returns to make sure they are accurate and follow the tax laws.
During the audit, a Revenue Agent will review your return to detect errors or area that do not follow the tax law or are not adequately supported.
You have the right to have professional representation if you are being audited by the IRS.

The topics covered in this article;

1 Purpose of an Audit

2 Why Was I Selected

3 What Happens During an Audit?

4 What to Do if the IRS Is Auditing You

5 Gathering Documents

6 Preparing to Meet with a Tax Professional

7 Avoiding an IRS Audit

8 Fines Associated with an Audit

9 Appealing an Audit Decision

Purpose of an Audit

Why Was I Selected

The IRS uses several different methods to select an organization or individual for examination:

Random selection and computer screening - sometimes returns are selected based solely on a statistical formula, known as a DIF Score. The IRS uses a computer generated program that compares your return to others in your income bracket and compares the differences in deductions you are taking against the average in your group. They develop these “norms” from audits of a statistically valid random sample of returns, as part of the National Research Program the IRS conducts. The IRS uses this program to update return selection information.
Related examinations – IRS may select your returns when they involve issues or transactions with other taxpayers, such as business partners or investors, whose returns were selected for audit.

What Happens During an Audit?

The IRS conducts audits either by mail or through an in-person interview. If selected for an in-person examination, the interview may be at an IRS office (office audit) or at the taxpayer's home, place of business, or accountant's office (field audit). Remember, you will be contacted initially by mail. The IRS will provide all contact information and instructions in the initial audit notice.

If the IRS conducts the audit by mail, the audit notice will request additional information about certain items shown on the tax return such as income, expenses, and itemized deductions. If you have too many books or records to mail, you can request a face-to-face audit, however, not recommended. The IRS will provide contact information and instructions in the audit selection notice you receive.

Depending on the issues in your audit, IRS examiners may use one of these Audit Techniques Guides to assist them. These guides will give you an idea of what to expect.

What to Do if the IRS Is Auditing You

Your chances of being audited are relatively low. The Wall Street Journal reported in 2017 that the audit rate had declined for the sixth consecutive year. Americans have about a one in 160 chance of being audited by the IRS, compared to one in 90 odds in 2010.

Although the IRS audits fewer than 1% of tax returns each year, some individual taxpayers will inevitably receive an audit notice. Keep in mind that you will receive an audit notice only in writing through postal mail, never in an email or over the phone. Although you may receive an adjustment notice from the IRS indicating you owe more taxes or are receiving a refund because of an error, this does not mean you are being audited.

If you do receive an audit notice, you should engage the services of a Tax Attorney or Certified Tax Resolution Specialist who is eligible to represent you before the IRS. The representative will conduct a pre-audit to prepare for your case. The representative will inform you if potential trouble area and can discuss strategy and potential outcomes.

Gathering Documents

You should respond to the audit notice as quickly as possible, especially if a minor error or missing paperwork triggered the audit. In this case, providing the documentation requested, may satisfy the IRS and eliminate the need for a full audit. Do not send documentation that does not directly relate to the audit. Remember that in about 80% of cases, the return is simply adjusted and errors corrected. This is known as a correspondence audit and does not require you to appear before the IRS.

When you mail documents to the IRS, make sure to request delivery confirmation. This will provide a record that the agency received your paperwork. For correspondence audits, the address where you send your documentation will be included on the audit notice.

The notice will also provide instructions about how to organize your documents. Doing so correctly can expedite the audit process. For example, you should organize documents first by year, then by type of income or expense. Some of the documents the IRS might request as part of an audit include:

Receipts – Present these by date with notes on what they were for and how the receipt relates to your business. In addition to providing the dollars paid or received for a service or product, certain kinds of receipts can prove mileage.
Bills – Include the name of the person or organization receiving payment, the type of service and the dates you paid them.
Canceled checks – Group these with copies of the bills they paid and any applicable employer reimbursement.
Legal papers – Include a description of what the case was about, when it happened and how it relates to your business, credit or deduction. Examples include:
- Divorce settlements including custody agreements
- Criminal or civil defense papers
- Property acquisition
- Tax preparation or advice
Loan agreements – Include a copy of the original loan with the following:
- Names of the borrowers
- Location of the property
- Financial institution making the loan
- Amount borrowed
- Terms (the number of months to pay)
- Settlement sheet
- If the loan was from an institution, include an end of tax year statement indicating interest paid
- If the loan was not from an institution, provide a statement from the payee indicating the interest paid that year as well as the payee’s address and Social Security number
- Provide a break-down of how you used the money
Logs or diaries – These might show the dates and locations of your travel as well as the business purpose and mileage. These might also show gambling winnings and losses as well as dates and locations. These might also show job-hunting activity and expenses.
Tickets – Label travel tickets with the business purpose for the trip and group them with other receipts from the same trip. Lottery tickets help provide proof of profit or loss.
Medical and Dental records
- Medical savings account statements
- A copy of a handbook or other statements showing benefit and reimbursement policies
- Physician statements
- Capital improvement records for medical purposes including appraisals of the property before and after the improvements
- Contract for attendant care
Theft or loss documents
- Insurance reports detailing the nature of the loss or damage
- If not insured, copies of fire department or police reports on the loss, theft or accident
- Photos or video showing the extent of the damage (if available)
- Appraisal from a qualified adjustor showing fair market value of the property before and after as well as an estimate of the damage
- Brief explanation of the loss
Employment documents – These might include uniform policies or dress codes, continued education requirements, W-2 reimbursement statements or policies.
Schedule K-1 – These are used to report each shareholder’s share of income, losses, deductions and credits when an S corporation files its annual tax return.

Questionnaires

If the IRS conducts an audit with you by mail, we may also require you to fill out a questionnaire. Here are some of the more common forms.

Schedule C - General Questionnaire
Schedule C - Car and Truck Questionnaire
Schedule C - Travel, Meals and Entertainment Expense Questionnaire
Schedule C - Repairs and Maintenance Questionnaire

Preparing to Meet with a Tax Professional

If you’ve decided hired a Tax Attorney or Certified Tax Resolution Specialist to represent you before the IRS during audit proceedings, he or she will need all the details of your tax situation. Before your first meeting with this individual, make sure you have gathered:

Your IRS audit letter.
All attached additional document requests (Form 4564 Information Document Request).
Copies of your tax return for the year for which you are being audited and for the two previous years, as well as your most recent tax return if it’s not the audited year.
Copies of all documents you provided to the person who prepared your taxes for the year in question.
The results of any previous audits if applicable.
All IRS notices and letters for the tax year in question.

This will provide your representative with a complete picture of your circumstances for the audit year, which will allow him or her to advocate on your behalf.

THAT’S WHY YOU NEED TO CALL Legacy Tax & Resolution Services – 855-829-5877

Avoiding an IRS Audit

Certain red flags on your tax return may increase your risk of an audit. According to Nerd Wallet, these include:

Submitting credit card statements for expenses in lieu of receipts.
Significant charitable contributions, especially noncash donations, that represent a disproportionate percentage of your income.
Substantial travel expenses.
Meal and entertainment expenses without documentation.
Claims that your tax records for the year are unavailable (because your hard drive crashed, for example).
Discrepancies between W-2 or 1099 income and reported income, which are easier than ever to detect.
Auto expenses without receipts.
Prevalent round numbers, which indicate you are estimating rather than providing real numbers.

When claiming large deductions, such as if you are affected by a natural disaster, provide as much proof as possible to support your numbers. This should include photos, canceled checks, reports from your insurance company, and repair receipts.

Even if none of the above circumstances apply to your tax return, you can still be randomly selected for an audit by the IRS using the DIF Score. Receiving an audit notice doesn’t necessarily mean you’ve done anything wrong or that you have cause for concern. High-income households are more likely to receive an audit notice than lower-income families are. If a business partner or co-investor has been chosen for an audit, your chance for an examination may have increased.

Most people who get audited do end up paying additional taxes. In fact, the Tax Foundation reported that the IRS collected an additional $12 billion from audited taxpayers in 2015 alone. You may be able to negotiate with the auditor to make a settlement for this additional amount by paying a lump sum if you can afford to do so. You can also request a payment plan to pay over time.

Fines Associated with an Audit

In some cases, an IRS audit can result in fines and penalties if you have underpaid your taxes. An erroneous claim that leads to a refund or credit will result in a fine of 20% of the refund or credit amount. If the IRS finds you have filed a frivolous tax return, which means you haven’t provided enough documentation to support the numbers you’ve provided, you could be subject to a penalty of $5,000.

Appealing an Audit Decision

When you disagree with the results of an IRS audit, you have the right to file an appeal. Mediation is a confidential but informal process in which an appeals officer who is trained in mediation techniques facilitates an alternative dispute resolution between a taxpayer and the IRS. Although this officer cannot make a decision or force either party to accept a decision, he or she can provide settlement proposals under the Fast Track Settlement Program.

The Fast Track program is available for small-business owners and self-employed individuals. The goal is a resolution of tax disputes within 120 days of initiation. If you disagree with the proposed adjustment after your audit, submit Form 14017, Application for Fast Track Settlement. This does not suspend your right to seek resolution through an appeal or other routes.

When you receive a notice or bill from the IRS it will explains your right to an appeal, you can follow the instructions on this correspondence to request an appeal. The appeals system is designed for those who do not agree with an IRS decision and have not signed the form indicating their agreement. If you cannot afford to pay the amount you owe, but you do not have grounds to dispute the amount, you are should not file for an appeal to stall collections. You can request a payment plan to pay over time.

You have 30 days to appeal from the day you receive the IRS audit decision. You may no longer appeal the decision after 30 days, but you will receive a Statutory Notice of Deficiency at that time. This allows you to petition the U.S. Tax Court if you have a dispute within 90 days. The U.S. Tax Court is the only venue in which you can dispute your tax liability without first paying the disputed amount.

If you agree with this liability, you must sign a waiver to acknowledge the stated amount. The notice will also explain how the adjustment was calculated.

Call 855-829-5877 for details.

LEGACY TAX & RESOLUTION SERVICES, LLC

BBB BUSINESS