The IRS can be scary when they take a closer look at your tax returns and finances to find mistakes and discrepancies. IRS audits can be upsetting even if you haven’t made a mistake in any of your returns and are compliant with all IRS rules. That is largely due to the responsibility of providing receipts, bank statements, and financial documents to prove to the IRS that you reported correctly. The IRS can go as far back as 10 years or more if they suspect significant tax evasion.
An IRS audit can hit any taxpayer. The agency randomly selects taxpayers to be audited based on a statistical formula. They may order an audit after matching documents such as W-2s or Form 1099 with the information reported to them on a tax return. If your business partner or investor is audited, you may also face an audit.
You are informed about the audit either by telephone or by mail. Email is not used by the IRS. Even after a telephone conversation with the IRS, you may still receive a letter regarding the audit.
Initially, the IRS asks you to provide certain documents relating to financial transactions and assets. The law requires all return filers to retain records used to prepare a tax return. Usually, the records should be kept three years after the return was filed, but it is safer to go back further.
If after the audit, the IRS finds that you owe back taxes, you will either need to pay the full amount in a lump sum or consider your payment options. The IRS will add penalties and interest on the original back taxes amount from the due date of the payments. If the back taxes are not paid or the agreement is defaulted upon, the IRS has the power to place a lien on any property and/or asset of the taxpayer without a court order. If back taxes remain unpaid after the lien is in place, the IRS can sell the property and/or asset under the lien to satisfy the debt.
If you disagree with the IRS audit findings, you may file an appeal, use an appeals mediation program, or request further review of the issue.