Sometimes a tax return is selected for an audit, even if the taxpayer or preparer completed and filed the return honestly, in good faith and on time. An audit does not mean there will be an automatic tax liability, but being prepared for an audit can help the individual defend the return. The following are a few tips to help get through an IRS tax audit as smoothly as possible.
Know what may trigger an audit
The IRS compares tax returns against statistical norms for similar returns. A return that is significantly outside of the norm may be selected, or one may be selected if the information on the return does not match that supplied on a W-2 or Form 1099. The IRS says it also may select a return for an audit if it relates to transactions with other taxpayers whose returns were audited.
Understand the audit process
If an auditor finds a return questionable, it is sent to an examining group for review. If the manager of the group still does not accept the return, it is sent back to the auditor, who will then accept the return or contact the taxpayer about an audit. The audit notification will be by mail or telephone, and not by email.
In most cases, the audit will be completed through mailed correspondence. Otherwise, the auditor will meet with the individual for an interview and document review. The interview may occur at a local IRS office or the taxpayer's business or home.
When notified of an audit, the worst thing to do is ignore it. It is important to take time to collect or prepare relevant documents that show the taxpayer's or business's income, expenses and deductions. Documentation showing where money went will help defend the taxpayer's claims. Most often, the IRS wants to ensure that:
- All income was reported properly
- Business expenses were actually business-related
- Activity claimed as a business is not a hobby, according to the IRS
The audit notice usually specifies what the IRS is analyzing in the audit. While preparing relevant documents is certainly helpful, sharing too much information about matters unrelated to the audit may cause the IRS to take on additional investigations.
Get legal help
Going through an audit can be complicated, and having an experienced tax attorney by your side is incredibly valuable. If you have been contacted about a personal or business audit, contact a tax audit attorney for guidance.