August 18, 2021
Audits are not a welcomed entity in anyone’s eyes. So, if you’ve just received a notice informing you of an impending IRS audit, do not panic. In some cases, people or businesses are selected for an audit at random. In others, an IRS audit is triggered by issues with your tax return, either because something appears irregular or incorrect or people associated with you, such as your business partners, are being audited as well. This dreaded process if often filled with stress and fraught with mixed emotions, because it may result in you having to pay fines or back taxes if the IRS or state agents find discrepancies on your filed tax forms. The good news is that riding out an audit doesn’t have to be scary or intimidating, as long as you have professional tax accounting guidance and representation.
How Will You Be Informed of an Audit?
Depending on the type of audit and the inconsistencies found in your taxes, you’ll either receive a certified letter or an official IRS agent will come knocking on your door. In most cases, a letter comes first. It will describe the type of audit that you’re facing (more on that below), as well as how the IRS will further contact you in order to obtain your records.
For example, for a simpler audit, the IRS will request copies of your records, either digitally or hard copy. You’ll have to submit these records to them, usually by mail, and they’ll proceed with the audit virtually. More complicated audits will involve an agent physically coming to your home or place of business to sift through your records and analyze the data. Of course, you will receive ample warning before an IRS agent darkens your door, unless you’ve ignored their previous requests and they decide to surprise you (which is never a good sign). This latter option doesn’t happen very often, unless they believe that you owe them a large sum of money due to your non-compliance with their requests.
Overall, the IRS and agents from your state tax agency prefer to warn you in advance and schedule a time for the auditor to meet with you. This way, you can prepare everything for them in advance, ensuring a much smoother and more efficient audit experience.
Different Types of Audits
Did you know that there are three different types of audits? Each is conducted by agents from the IRS or the state in which you reside in or filed taxes. Some types are more complicated or in depth than others. The audits you may be subject to are as follows:
- A Correspondence Audit – This is the simplest type of audit. You will not be required to go anywhere (besides your local post office to mail in your records), and you will not have to meet an IRS agent face to face. Instead, all correspondence is conducted through mail. You’ll receive a notice stating an intention to audit your records. That notice will have further instructions, such as mailing a specified type of monetary records for a particular length of time. Once all the paperwork in question is submitted, the process is finished on your end, unless they require additional information from you during the course of the audit. You will receive a written notice explaining their findings and next steps after the audit is complete.
- An Office Audit – Office audits are slightly more complicated. With them, you’ll once again receive a written notice. However, this one will instruct you to gather your records (they will specify which ones they want to inspect), and you’ll need to make an appointment to meet with an IRS agent in their office. At this appointment, you will meet with an agent and provide them all the documentation requested. From there, they will either send you home and evaluate your records to conduct the audit or complete it in front of you in the office. This one also ends with a written notice of their findings and a specified course of action.
- A Field Audit – Field audits are the most complicated of them all. With a field audit, an IRS agent comes to your door or the door of your accountant. These audits tend to be lengthy, as the agent will pour through all your tax records in search of discrepancies. You usually receive some warning, through a written notice, so you can prepare in advance for a field audit. However, in major offenses, the agent may just pop up unexpectedly, especially if they suspect that you are a flight risk or might be hiding records and concealing information. It is best to be clear with the field auditor and have your information ready when they arrive to avoid further scrutiny or issues.
IRS Versus State Audit
Now that you understand the differences between the types of audits, let’s take a look at both an IRS audit and state audit. Really, the names make the differentiation clear. An IRS audit is one conducted by the IRS, the main tax collector for the federal government. A state audit is pursued by officials of the state that you reside in. While IRS audits are much more common, having one requested by them often triggers a state audit as well, because any discrepancies found are likely to affect both parties. You might undergo an IRS audit only to find that the state wants to examine your records as well, once the federal government is done.
How to Prepare for an Audit
Once you receive notice of an impending audit, you will need to take several steps to properly prepare. First, you’ll need to contact an attorney and an accountant. If you already have an accountant, simply contact the person who did you taxes and holds your tax records.
Next, with their professional guidance, you will need to gather all the information requested by the IRS or the state. Any written notice will contain a detailed list of the records they will want to review. This can be anything from your pay stubs to previous tax returns, as well as records of any mortgage payments, your bank statements, various receipts, and even information or statements from any brokerage accounts that you hold. Make sure to have all these things prepared for the auditor and reviewed by your attorney and accountant beforehand.
After you’ve gathered your records, it’s time to present them to the auditor. Follow the instructions in the notices implicitly, and submit them in the exact manner requested, either by mail, in person, or in your own office, so the audit can take place in an efficient, timely manner.
What Should You Expect Post Audit?
Following the audit, you’ll receive a written notice from the IRS or state tax commission with their findings. Obviously, the ideal result would be that you do not owe anything at all, having submitted your tax returns properly. On the other hand, they may find that you owe them money for back taxes due to mistakes, discrepancies, or funds that weren’t properly disclosed. Either way, if you owe money, you have the right to appeal those findings, as well as set up a payment plan, if you opt not to appeal the results or truly owe money to the state or federal government. Once a payment plan is in place, make sure to follow it to the letter, lest you end up subject to more severe penalties and consequences.
Seeking Professional Help with the Audit Process
Have you received notices about an impending IRS audit and or state audit? If so, you’ll need assistance gathering the proper documentation and records to protecting yourself, your business, and your assets during the process. Seeking the guidance of a professional tax accounting firm can drive optimal results and help you navigate this process as painlessly as possible.
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