Tax audits are fairly uncommon, affecting just 1% of all individual tax returns filed in the United States. Odds are you won't hear anything further from the IRS after you submit your return and either pay your taxes due or receive your refund.
However, if you do get audited, you need to know what to expect. Here's a quick guide to the different types of tax audits and what you should do if you get chosen.
Not all audits are created equal
The word "audit" simply means someone at the IRS is going to conduct an examination of your tax return. This could happen because something in your return raised a red flag or simply because your return was chosen at random.
Whatever the reason for your audit, the process can take three different forms: a mail audit, an office audit, or a field audit. The next steps you'll need to take can be very different, depending on which variety of audit you're facing.
Mail audits: generally no big deal
All three types of audits will come with a notification by mail, but a mail audit (also known as a "correspondence audit") is one that doesn't require you to physically meet with an IRS agent.
Generally, a mail audit is merely a request for documentation to support the numbers on your return. For instance, if you had high medical expenses this year, the IRS may conduct a mail audit to verify that you're entitled to a certain deduction you're claiming. Some common items requested in a mail audit include:
- Mortgage statements and documents
- Brokerage account statements
- Pay stubs or W-2 forms
So long as you're able to submit proof of whatever the IRS is questioning, your audit should go no further. So if you save your tax documentation, a mail audit shouldn't be a big deal at all.
Office audits: a little more specific
An office audit is the next step up from a mail audit and will require you to appear in person at your local IRS office.
Office audits are also conducted to verify your income or deductions, and you'll usually have to bring your receipts or record books to substantiate certain claims on your tax return. A common reason for an office audit is to allow the IRS to examine the books of a small business, as this is something not easily or conveniently done by mail.
Field audits: potentially more serious
The most thorough, and potentially most serious, type of audit is a field audit. This is a broad examination of your tax return that takes place at your home or your place of business.
Field audits can happen for any reason, but usually it's because your return raised serious red flags or there's something in question that can't be verified by mail or at an office. For instance, if you claimed a home office deduction on your tax return, there's no way for the IRS to verify that part of your house is in fact used as a home office other than to have a look in person.
What happens next?
With any of the three types of audits, so long as you're able to prove the information you provided on your tax return, the IRS will most likely be satisfied with the audit, and your tax return will remain unchanged.
However, if you're unable to document the items in question to the IRS' satisfaction, things get a little more complicated. In this case, the IRS will propose changes to your tax return. For example, if you claim a tuition deduction and can't produce proof that you paid tuition, the agent will propose that the tax you owe be adjusted upward by the amount of the deduction. You'll receive a letter and will have 30 days to respond.
If the IRS proposes changes, you can accept the changes and pay the resulting charges to the IRS, or you can challenge the agent's assessment. If you choose to challenge the assessment, you can set up a conference with an IRS manager to further review your case or request a formal appeals conference. However, unless something has significantly changed in your ability to document the items in question, the appeal is unlikely to end in your favor. Keep in mind that interest will accrue on any unpaid tax from the date you filed your return, including the duration of the audit process, so it's usually not worth appealing unless you're almost certain you'll win.
For a more thorough explanation of post-audit procedures, consult the IRS' website or contact a tax attorney.
The bottom line
So long as everything you claim on your tax return is factual, an audit should be no more than a minor inconvenience. If you're an honest taxpayer who knows what to do in the unlikely event of an audit, you should sleep soundly this tax season.
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