What does Being Audited by the IRS Mean ?

What is IRS Audit ? How to Deal With It

Really every taxpayer has this question ” what does being audited by the IRS mean? in his/her mind . Psychologically taxpayers are generally scared of tax audit. The IRS audit of your tax return is nothing but close scrutiny of your income declaration and the claim of exemptions and various tax deductions. The IRS checks whether the claim is correct and as per the US Code 26 and other Rulings.

How do IRS select return for audit ?

There are two methods of selection of cases ( tax returns) for audit –

  1. Based on certain normsThey just feed these norms and get the computer select it on rand basis
  2. When IRS find some related issues or transactions with other taxpayers, whose returns were scrutinized under IRS audit earlier

How does the IRS notify you of an audit ?

The IRS will notify about selection of your tax return for audit by mail . There is no other way of notifying the irs audit selection. The IRS will provide all contact information and instructions in the letter informing you about the audit of your case .

How does the IRS conduct audit?

The IRS will adopt either or both of following methods to complete the audit

  1. They may send you mail seeking answers to a set of  questionnaire  or they may ask you to furnish documents pertaining to income or deductions/exemptions claimed in the tax return
  2. They may also conduct an in-person interview to review your tax records. The interview may take place either  at an IRS office (office audit) or at your home, place of business, or accountant’s office (field audit).

You can also seek  for a face-to-face audit in case you think that on certain issues you need to explain personally or documents are voluminous and hard to send by mail. It should be noted that US Code 26   requires you to keep all records you used to prepare your tax return – for at least three years from the date the tax return was filed. During IRS Audit proceedings some of those records may be sought by the IRS auditor.

Types of IRS Audits

Basically there are three different types of examination maybe conducted when your case is selected  by the IRS for audit.

  1. Audit By Correspondence : Most common type of audit and is done by mail. You may get  mail request  from IRS for specific documentation to support particular items on the tax return.
  2. Audit at your place : The IRS may chose to visit your home, place of business, or your tax professionals office to perform the audit. This is the least common form of audit and is only used if the individual or business being audited earned well over $100K.
  3. Office Audit: Under this IRS would like you to visit their office to meet with an IRS auditor. The IRS will determine the time and the particular documents that it would like you to bring for support

How long does an IRS audit take?

Once the IRS selects your case for audit , statute give them 36 months to complete . But since 8 months are required by IRS for processing appeal , IRS has to complete the audit within 28 months from the date the audited taxpayer filed the tax return, or by the date it was due, April 15, whichever is later.Section 6501 of US Code 26 states so as under :

26 U.S. Code § 6501 – Limitations on assessment and collection

(a)General rule

Except as otherwise provided in this section, the amount of any tax imposed by this title shall be assessed within 3 years after the return was filed (whether or not such return was filed on or after the date prescribed) or, if the tax is payable by stamp, at any time after such tax became due and before the expiration of 3 years after the date on which any part of such tax was paid, and no proceeding in court without assessment for the collection of such tax shall be begun after the expiration of such period. For purposes of this chapter, the term “return” means the return required to be filed by the taxpayer (and does not include a return of any person from whom the taxpayer has received an item of income, gain, loss, deduction, or credit

It happens , that because of various reasons , IRS may not be able to complete the audit within 3 years . In such case , IRS may extend the audit time. Although you are within your rights not to agree to extension of audit period, it is generally advised to accept or at least negotiate about time of extension keeping several factors like

  •  more time to provide further documentation to support your position;
  • more time to request an appeal if you do not agree with the audit results; or
  • to claim a tax refund or credit.

How far back can IRS audit ?

IRC 6501 provides the time limit for IRS audit upto  3 years after due date of filing the tax return or date of filing original return , whichever is later. However there are three exceptions to this statute

  1. If  income was under-reported by more than 25 percent,IRS has six years in which to conduct an audit and assess additional taxes if they are warranted.
  2. No time limit in case of delinquent non-filed tax return or fraudulent tax return
  3. If you filed form 872 which is consent form for extension of audit

What happens if you fail an IRS audit ?

The IRS can apply an additional percentage to the amount of taxes you owe them:

  • 20% or 40% penalty depending upon the kind of  mistake on your tax return.
  • 75% penalty: generally for more serious cases, like tax fraud.

If IRS audit proposes adjustment to your income which you find incorrect , you can request a conference with an IRS manager and . The IRS also offers mediation which  is an informal and confidential dispute resolution process .

Lastly you can file a protest to the order passed by the Audit officer to Office of the  appeal .

Info-graphics on IRS Audit

what is an irs audit

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