The question has probably crossed your mind this tax season. What's the reality?
Unless you filed an extension, it's likely that your annual tax preparation marathon is over. Whether you did your taxes yourself or had a professional complete your return, you probably breathed a sigh of relief as they were filed.
At the same time, you may have been thinking about some tax-related issues that weren't so pleasant. Did I declare all my income? Was I entitled to the deductions I claimed? What about credits? Should I really have taken them?
And then the big, ugly one hits: What if I get audited?
Even if you're certain you completed your forms and schedules with absolute accuracy, here's some bad news: You can be audited if your return is chosen at random, or as the result of the IRS's computer screening. The latter looks at your numbers and compares them to what is considered the "norm" for returns similar to yours.
Hopefully, you won't have to revisit your 2016 tax return. A random audit is possible, though.
You can be audited if you have investors or business partners who've been selected for audits. The IRS also looks for specific red flags, such as unusually high or low numbers in certain areas, as well as other situations.
Communicating with the IRS
If you're selected for an audit, how will you find out? The answer to that question is very important. The IRS will only notify you via a letter that arrives in the U.S. Mail. The IRS will not email you nor call you on the phone.
Imposters claiming to represent the IRS have scammed hundreds if not thousands of people via phone or email contact. These scammers often insist that you owe money (even if you don't believe you do) and that you must settle your debt immediately or face dire penalties.
In the case of email, scammers may not even ask for money. They want any personal information they can get about you, especially your Social Security number. For example, they may ask you to validate your personal information. Never click on any links or open any attachments in such messages. If you'd like, you can report it to firstname.lastname@example.org.
How Audits Work
You won't necessarily be sitting across a desk from an IRS agent for an audit, though you may be. Some audits are conducted in person, at places like:
An IRS field office
An accountant's office
Your home, or
Your place of business
Sometimes, audits are even conducted long distance through the mail.
What You'll Need
Obviously, the IRS is going to want to see documentation for the information you provided on your tax return, records of income, expenses, itemized deductions, etc. This is why you're urged to take such care with your historical tax returns. The IRS recommends that you keep copies of everything for at least three years from the date of filing. This includes things like receipts and bills, canceled checks, medical and dental records, and legal papers.
The IRS can require a six-year history for audits if it finds what it calls a "substantial error." But if you're going to be audited, it's more likely to be within two years.
Three Possible Conclusions
What happens when the audit is complete?
No Change. The IRS determines that there were no errors or misstatements in your return.
Agreed. The IRS finds reason to make changes to your return, and you agree that they're warranted.
Disagreed. The IRS finds reason to make changes to your return, but you don't agree with their findings.
With the third situation, you have three options. You can go through the IRS's Alternative Dispute Resolution (ADR) program, which provides mediation services. You can file an appeal. You can also simply request a conference with an IRS manager.
Regardless, don't attempt to go through an IRS audit alone. If you're selected, we can walk you through the entire process and give you the professional representation you should have.