The purpose of a tax audit is to challenge the information that has been reported on the original tax return filed with the IRS. If you’ve been selected for an audit, it’s important to know that this doesn’t always mean there’s a problem with your return. However, it’s wise to prepare the best you can and gather the information being requested by the IRS. An audit process follows a set number of steps outlined below.
Step 1: Notification
If you’ve been selected for an audit, the IRS will notify you by mail. In order to make the selection, the IRS uses several methods, including computers and auditors. The two main ways tax returns are selected for audit are:
1. Random selection and computer screening – Using a statistical formula, the IRS compares your tax return against “norms” for similar returns. If yours is far enough outside the norm, it can be selected for a closer look.
2. Related examinations – If the IRS is auditing another taxpayer that you have dealings with (primarily business or investors), they may select your return as well.
After an initial selection, an auditor review will ultimately determine if there are unanswered questions or discrepancies that call for a closer look.
Step 2: Preparation
Your audit notification will list the specific information your examiner needs to conduct the examination. These are the documents that will support the information reported on your return.
Thoroughly review your supporting documentation before your examination or, even better, consult with a licensed tax professional. If there is any slight financial detail that doesn’t coincide with what you’ve reported, the IRS may disallow the deductions reported on your tax return, which will result in an increased tax liability.
Step 3: Examination
Your audit notification has the date and time of your examination, as well as the method. Depending on the case, it may be held in a local tax office, or over the phone.
Remember, the bottom line of an audit is that the IRS has some mismatched information reported on your tax return or are questioning specific deductions taken. If you’ve filed correctly and have provided accurate information that you are able to substantiate, there’s no reason to be worried about what an audit will uncover.
Step 4: Conclusion
An audit concludes in one of three ways.
1. No change: If you have substantiated all of the items being reviewed, the audit will result in no changes to your tax return and nothing will happen.
2. Agreement: If the audit finds proof of a discrepancy, the IRS will propose changes to the original return. If you understand and agree with the changes, you’ll take the appropriate actions to complete the audit.
3. Disagreement: If the audit finds proof of a discrepancy, but you disagree with the proposed changes to the return, you can request a conference with an IRS manager or file an appeal. Challenging audit results is its own process.
Tax Defense Network is here to help at every step. If you’d like a tax professional to take a look at your documents, or help decipher what the examiner is asking for, give us a call for a free consultation.