If there’s one thing many American taxpayers don’t want to see in their mailbox, it’s a notice from the Internal Revenue Service (IRS). In particular, nobody wants to get a letter informing them of an IRS tax audit.
One reason many taxpayers dread an IRS audit is that the process could lead to tax penalties, interest, and other dire consequences. While your chances of an IRS audit are quite low, you cannot guarantee the IRS won’t scrutinize your taxes.
This article will discuss everything you need to know about an IRS tax audit. Understanding how the process works can help minimize your likelihood of being the subject of an IRS audit.
What is a Tax Audit?
A tax audit is a process in which the IRS reviews your tax return to make sure you’ve reported your income and deductions correctly according to existing tax laws. Here, the IRS examines the information you’ve provided. If they find inconsistencies, they will have a second look at your return and ask for additional information from you for counter-checking and verification.
4 Types of IRS Tax Audits
If your account has been flagged for an audit, you may be subjected to one of the following types of IRS tax audits:
1. Office audit
An office audit involves an in-person interview conducted by an IRS examiner at an IRS office. Before the actual interview date, the IRS will first notify you by mail.
The issues tackled in an office audit normally involve itemized deductions, income, and expenses. IRS examiners use Audit Techniques Guides when facilitating the process.
2. Field audit
A field audit is similar to an office audit, only more detailed in terms of scope. Another difference is that the field audit is conducted either at your home, business office, or accountant’s office.
During the audit, the IRS examiner may request to verify things outside of specific records. If you run a business, the examiner might ask to interview your employees. The IRS could also ask for a tour of the facility. The audit can last a day up to a week depending on the complexity of the account.
3. Mail or correspondence audit
The mail or correspondence audit is the most common and also the simplest form of IRS audit. Here, the IRS will send you a letter requesting additional information about specific items on your tax return such as itemized deductions, income, and expenses. In particular, the agency may ask you to send copies of essential documents like receipts, bills, canceled checks, tickets, and legal papers.
4. Taxpayer Compliance Measurement Program (TCMP) audit
This type of audit is different from the other IRS audits because it is conducted mainly using a computer system. Here, each return is assigned an Unreported Income Discriminant Function System (UIDIF) score. A high UIDIF score indicates a possibility of unreported income.
If your tax return is among the highest-scoring returns, your account will be likely tagged for further review. The IRS examiner assigned to your account may request documentary proof from you such as bank statements, contracts, medical and dental records, employment documents, and more as applicable. The IRS will use these documents to assess your tax return’s accuracy.
5 Possible Outcomes of an Audit
After the IRS has audited you, different possible outcomes may arise. Here are some of them:
1. No change in your tax return
The IRS audit process is designed to ensure that all taxable income is properly reported and taxed. An audit may lead to no change in your tax return if you have correctly reported your income, deductions and expenses.
2. The IRS may propose a change on your tax return
The IRS can propose a change in your tax return if they find an error in the information you have provided. For instance, if you have declared incorrect income or claimed deductions you are not eligible to, the IRS will request to adjust the tax amount due on your return.
3. The IRS may charge additional interest against your account
An IRS audit may result in the accrual of additional interest on your account. That is if the IRS confirms that you owe back taxes, interest will accrue on top of your tax liability. The interest rate is 3% plus the federal short-term rate, which is determined by the IRS every three months.
4. You may have to pay a civil penalty
The civil penalty would come into play if you failed to file your tax returns. If proven that you indeed neglected to file your returns as required, the IRS will charge a penalty amounting to 5% of the unpaid tax to your account for each month the return is late. The maximum civil penalty is 25% of the tax liability.
5. You may face criminal charges
After an audit, the IRS may pursue criminal charges against you if they believe you have intentionally refused to pay your taxes or if you willfully declared false information on your tax return.
Tax evasion is a serious crime. So, if you claimed false expenses on your return, you can expect the IRS to investigate further into your case. In this case, your safest remedy is to turn to tax resolution services to help you resolve the issue.
Responsibility is Key
One way of staying on top of your finances is by being mindful of your tax responsibilities. But, taxes can be complex. In that case, getting professional tax advice may be necessary to help you avoid potential issues, from standard tax audits to more comprehensive ones.
If you run into a tax problem and need a negotiation expert to help you settle the matter, reach out to us at Peace of Mind Tax Help. Our team includes leading experts in tax negotiation and mediation, and we can help minimize your tax liability.