One of the biggest fears that people have is of getting audited by the Internal Revenue Service. Yet if you're unfortunate enough to get audited, don't panic. Getting through an IRS audit might not be fun, but it's also not a guarantee that you'll be on the hook for a lot more tax. Below, you'll learn more about five things that anyone who's getting audited should know about the audit process and what to expect.
1. How the IRS picks people to get audited
The IRS has several methods for choosing which tax returns get audited, and only some of them involve known errors. For some taxpayers, the IRS uses a random screening and selection method, choosing some returns based solely on the presence or absence of certain factors and by chance. Also, if you have a relationship with someone else who was selected for audit, such as a business partner, then the IRS might select your return for audit because it's likely to have the same issues.
Still, one of the most common reasons for getting audited is when your returns don't match up with what other information providers have said. For instance, if your W-2 or 1099 forms show different amounts of income than you report, then the IRS will want to take a look to determine which records are in error.
2. How the audit process works
The IRS informs people of an audit either by regular mail or by telephone, choosing never to use email notifications. Once the audit is opened, the IRS can either conduct the audit through the mail or by conducting an interview in person, either at an IRS office or at your home or business. In either event, the IRS will let you know what records you'll need to collect in order to substantiate your returns and answer any questions. How long an audit lasts depends on how complicated your tax issues are, but you'll always find out about any proposed changes with an explanation of the basis for the changes, and you'll have the right to agree or disagree with those changes. If you disagree, then a further conference can occur, or various appeal options are available.
3. How a representative can help you
You're allowed to represent yourself in your audit, but if you prefer, you can also have outside assistance. The IRS allows you to use an attorney, accountant, enrolled agent, or unenrolled tax preparer as a representative in an audit, and they can either work alongside you or act as your substitute in audit proceedings. Preparers who aren't enrolled agents have limited powers in audits, as they can only discuss returns they prepared and can only deal with IRS examination proceedings rather than appeals and more advanced audit proceedings.
4. Why staying on track is crucial
Audit proceedings in complicated cases can last for a while, but there's still a timeline that you're expected to follow. At the end of the first appointment with an auditor, you'll talk about a date on which you can mutually agree that the auditor will plan to have a report of any proposed changes ready. This date is chosen to give you enough time to gather necessary records, but while it's somewhat flexible, the IRS prefers not to change this mutual commitment date unless further examination reveals a change in the circumstances surrounding the audit. By exchanging information in a timely manner and keeping everyone informed of possible delays, you'll be able to navigate through the audit process more efficiently.
5. How to handle tax payments
If you're audited and found to owe tax, then you generally have several options for repayment. Payment in full by check, credit card, or electronic transfer is always the simplest, but if you can't afford it, there are other possibilities. One is an installment agreement, in which you agree to pay certain amounts over time. Typically, you'll have to pay interest on deferred tax payments in installments, but you can sometimes take advantage of reduced penalties and forestall any enforcement actions from the IRS. In addition, offers in compromise can sometimes actually reduce your tax owed, although it takes more effort to demonstrate your need for such relief.
Getting audited is never much fun, but it also doesn't have to be the nightmare that many fear. By staying on top of the process and continuing to push it forward, you can ensure that your audit experience will be painless as possible.
Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.