IRS Income Tax Audit Types, Process, Tips, and Representation

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What is a tax audit?

When the IRS confirms the details listed on your tax return to establish its accuracy, it’s known as the tax audit. Many individuals must have heard that audit selection statistics are against them. About one in every seventy-five individuals will be audited by the IRS. When looking at these statistics, it means that roughly eighty percent of all individuals will face an IRS tax audit sooner or later in their working lifetime. The statistics regarding the numbers are dependent on income levels and employment types.

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The selection process for an IRS tax audit

If you are chosen for an audit, it is not necessarily a random occurrence. Those who do get picked have a higher likelihood of creating an error or making a fraudulent claim on their IRS tax return. The IRS computer is really what determines who is going to get audited. Every tax return is given a designated score by the IRS computer. If that tax return gets a high number, it means it has a greater likelihood of getting an audit. Individuals who have low income but high expenses are usually looked for by the computer. For example, if you report that your monthly income and mortgage payment are around the same amount, the computer will give that tax return a high score. This is because it measures the unlikelihood that you will be able to pay other monthly expenses after paying your monthly mortgage. After the tax return is given a score by the computer, they are then given to an IRS specialist. Once, in the specialists’ hands, about one-tenth of them will go into the audit process.

Instructions- if you are subjected to an audit

Throughout the process of the audit, the IRS establishes if you have accurately reported all your income and made the proper deductions. To prove that you filed your tax return correctly, you need to give the IRS supporting documentation. After this, the IRS then determines if the reporting you did was accurate. If they deem your return is incorrect, they will assess your tax return and there may be Additional taxes that you will have to pay. There are very rare occasions during an audit, where the IRS realizes that you overpaid on your tax return and will then issue you a refund. You need to know that you can try to fight the IRS on an audit, but about eighty percent of the time, the IRS is correct. This is often due to the fact that the taxpayer is unable to show acceptable supporting documentation. Based on this, the IRS states that a majority of audits are not incorrect, because a taxpayer is cheating the system, but moreover because they did a bad job keeping records of everything.

Types of IRS audits

The IRS employs three specific types of audits. Whichever audit the IRS chooses is determined by the total sum of the revenue reported in the tax return.

Correspondence audit

A correspondence audit is the most popularly employed audit by the IRS. Everything is done through the mail. The IRS requests you mail specific documentation in an effort to support certain claims you made on your filed tax return. The documentation they usually ask for are sale of real estate, stock, and specific details regarding specific deductions. These audits occur because a discrepancy was found between your return and third-party documentation.

Office audit

Unlike a correspondence audit, an office audit requires that you go to a pre-determined meeting with the IRS. They will specify the explicit documents that you need to bring to support your refund. To initiate this meeting, the IRS will mail you a letter with the time and date you need to show up at their office. In an office audit, the auditor only requires to look at what they consider to be “significant” items. They will also ask questions about items you may have no listed on your return. You can ask not to talk about these items at that moment, because maybe you do not have the necessary documentation, so those items will wait until a second meeting. Before an office audit, it is recommended to seek the counsel of a tax professional, like a tax attorney or CPA. They can provide you with necessary advice on what you should say and what you should not say and also give you any additional support your require

Field or home audit

Unlike the other two audit forms, when this one occurs, an auditor comes to your home, place of business or accountant’s office. First the IRS will mail you a notice that they would like to come to either your home or place of business to complete an audit. This is considered the most serious of the three audits, because the investigators will review all financial records and returns. If the field audit turns up errors or fraud, the potential consequences can be liens on a property, additional taxes, criminal investigation, fines and court hearings. It is highly advocated that you seek help from a tax professional who will assist you to guarantee the audit flows smoother.

Tax audit representation

It is imperative to understand the rules involved with an audit. It is significant to note that IRS tax auditors are actually experts in reading the faces of individuals and knowing how to uncover items that were not part your initial audit notice. If you want a better outcome during your IRS audit, hire the services of a tax professional. Receiving professional assistance is a good decision and can save money. When faced with an IRS tax audit, you need to know that this is a game, and like with any game, there are strategies you need to employ to get the best possible outcome. The best way to ensure this is by getting a tax professional to help navigate.

Which is the best strategy for you? Find out now.

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