You're Being Audited by the IRS: What Happens Next?
You submitted your tax return, and thought that you were done with that hassle for the year. Then, you received the notice that every taxpayer dreads receiving—you’re being audited by the IRS. What does this mean for you? What can you expect from your audit? And can you get help to guide you through this process? Here’s what you need to know.
Why Were You Selected?
First, let’s talk about why you may have been selected for an audit in the first place. This is important to understand, because many individuals panic when they receive their audit notice, assuming that they did something wrong on their return. This is not necessarily the case.
The IRS has very limited resources to use in pursuing incorrectly filed taxes. So, they use a sophisticated algorithm to analyze our tax returns and look for certain “red flag” items. Here are a few examples of what these algorithms search for on that return you filed:
- Extremely large deductions in relation to income (e.g., claiming $25,000 in deductions when reported gross income is $30,000)
- Claiming certain deductions that are commonly abused by taxpayers, such as home office deductions and business vehicle deductions (however, if you genuinely qualify for these deductions, you should not avoid claiming them on your return)
- Showing recurring losses for your business
- Deducting business expenses that don’t coincide with the trade (e.g., a CPA deducting construction equipment)
If the IRS’s algorithm picks up on items like these, it will flag your return, and increase your chances of being selected for an audit. Of course, it is perfectly likely that you may have these kinds of items on your return, and the information still be accurate. So, it is not necessary to panic if you’ve been selected for an IRS audit.
What Happens Next?
Now that you understand why you might have been picked for this less-than-pleasant experience, let’s talk about what you can expect to happen. This is going to depend on the type of audit you are receiving. There are two types of audits performed by the IRS; the first is an in-person audit. These generally occur if the IRS is investigating more than just one or two items on your return.
With this type of audit, an IRS agent will come to your home or business to review your records. They’ll be reviewing three main issues:
1. Income – The agent will want to review records for your bank statements, state and federal tax refunds, alimony, pensions, prizes, asset sales, and any other sources of income you may have.
2. Tax returns – They will also look at your tax returns for the last three years to see if you filed on time (or at all), and will make any necessary adjustments to those returns as well.
3. Penalties – They will ask you about any tax penalties you’ve received in the past, and will decide if penalties need to be imposed for the current audit.
Throughout this process, it’s important to understand that the burden of proof lies with you, the taxpayer. This means that it is up to you to provide documentation that legitimizes any deductions you may have claimed. This is why it is so important to keep detailed records and have them accessible in the event of an audit.
The second type of audit is a correspondence audit, and is much simpler and easier to get through. The IRS will simply send a notice, requesting additional information or documentation for a specific deduction or other item on your tax return. You submit your records, and one of three things will occur:
1. The IRS will be satisfied with your documentation and nothing on your return will change.
2. The IRS believes you owe more in taxes, and suggests a change to your return. If you agree to the change, you sign a document stating so, and make the additional payment to the IRS. If you disagree, you can challenge their assessment, and they will schedule a conference for you with an IRS manager for further review.
3. The IRS believes you paid too much in taxes, and they send you a refund.
Note that if the IRS requests documentation for a deduction you claimed, and you do not have the proper records, they will typically remove that deduction from your return. Again, this is because the burden of proof lies on you to prove that you actually qualify for the deductions you’ve claimed.
Can You Get Help?
If you’ve been selected for an audit, you do have the right to representation; this is especially important if you are receiving an in-person audit. If you’ve found yourself in this situation, please contact one of our CPAs to discuss receiving professional audit representation today.
Camputaro and Associates
Certified Public Accounting Firm
136 N. Orchard Street, Suite 8
Ormond Beach, FL 32174