If a tax return you filed is selected for audit, it is normal to feel anxiety over the process. Some audits are conducted by mail, and some are conducted in person. For either scenario, follow some basic tax audit tips to understand what is expected of you during the examination and to understand your rights as a taxpayer.
Types of Audits
The IRS will notify you in writing if you've been selected for an audit. The correspondence lists the tax year in question and gives you instructions on what to do. Mail-in audits are usually a result of data mismatch between the income or dependent information you claim on your return and information reported to the IRS on your behalf by third parties. In these cases, you can mail in documents supporting your claim with the response form included in your correspondence. In some cases, you may have to complete an amended return to complete your claim. Make sure to provide all documents by the deadline stated in the correspondence and keep copies of the items you send. Failure to provide the information in a timely manner can result in the IRS making additional tax assessments against your account.
If you're selected for an in-person audit, the reason can stem from a variety of issues with your return, or for no reason at all. The IRS occasionally selects random returns for exam. In-person audit correspondence lists the contact information for your examiner and a deadline to contact the agent to schedule your audit. Try to schedule the audit at your examiner's office to avoid IRS visits to your home or business. In addition, select a date that is far enough ahead to allow sufficient time to gather your records.
The purpose of an audit is to examine proof that items you claim on your return are accurate. To prove this, you must be prepared to support all items by providing acceptable documents. If you have these items when you initially file the return, keep them with your tax paperwork. If you have not kept records, and are selected for audit, decide where you can track down the documents you need.
Proof of Expense Payments
Bank and credit card statements track proof of most payments you make and are frequently requested for in-person audits. If you don't have the statements you need, contact your bank and credit card company and request the copies that you need for the exam year. You might also need copies of cancelled check images if your bank statement does not already contain them.
Proof of Dependents
If you claim dependent children on your tax return, it is common for an examiner to request proof that you provided financial support for your children and that they lived with you the majority of the year. Examples of acceptable documentation include medical and school records. These records include primary parent contact information and addresses for the year in question. Request records directly from your child's physician and school of attendance for the exam year. In addition, you might have to provide proof of child care and living expenses. Your bank and credit card statements can be used to provide proof of these expenses.
Proof of Business Expenses
If you are self-employed or claim expenses for 1099 income on the examined return, you must provide proof of your business income and expenses. Common items requested by auditors include mileage logs, titles for business assets, and receipts for expenses. In addition, the examiner will request customer invoices to verify income. Invoice payments should correspond with bank deposits. If you had bad business debt, you may have to prove how you tried to collect on the accounts.
Problems Supporting Claims
If you have trouble locating documents to support the items on your return, but think you can eventually track them down, request more time to obtain the items you need. If it is impossible to locate the information, the examiner may disallow a portion of your deductions or business expenses. This could result in an increase in tax owed, so it's best to take the time to find documents. In some cases, your auditor may approve a reduction in additional penalties assessed if you have been a victim of natural disaster, flood or other casualty and as a result, lost irreplaceable documents required to complete your exam.
Some of the most important tax audit tips come from understanding your rights as a taxpayer. The basics include:
- Timing - The IRS has three years from the date you file a return to conduct an audit.
- Documentation - You have the right to receive sufficient time to gather or reconstruct records needed to proceed with the audit.
- Representation - You have the right to have a representative present for the entire examination process. If you authorize someone to act as your power of attorney, the IRS must correspond directly with your representative.
- Appeals - You have the right to appeal the results of an examination and to speak with the examiner's manager if you feel you are treated unfairly during the exam or can't come to an agreement with the agent.
- Payments - If your exam results in a balance due, you can request an installment agreement or an alternative payment resolution.
After your exam is complete, your auditor will give you paperwork that details the results of your exam and explains any changes that have been made. If there is a balance, your auditor may ask you to sign the paperwork and establish payment arrangements. You do not have to sign the paperwork immediately, so don't feel pressured to do so. Request an opportunity to review the paperwork at home and send in your response.
Generally, you must provide a response within 14 days, so review each item carefully to make sure you understand any changes and agree with them before providing your response. If you do not respond within the specified time period, the auditor's changes will become permanent.