The IRS, or Internal Revenue Service, is the U.S. federal agency responsible for collecting taxes and enforcing tax laws. In simple terms, all tax payers including individual or big corporates submit their tax returns to IRS and are answerable to it. IRS audit generally creates additional responsibility on tax payer. Anyone needs to be knowledgeable about IRS audit and let us learn its nuances, how to face it, and emerge successful from it. This article clearly draws the materials from IRS website as per the details given below:
Let us learn the details.
What is an IRS audit?
An IRS audit is a review/examination of an organization’s or individual’s books, accounts and financial records to ensure information reported on their tax return is reported correctly according to the tax laws and to verify the reported amount of tax is correct.
What are types of IRS audits?
Basically, they can be named as correspondence audit, office audit or field audit.
How does one get selected for this audit?
- Random selection and computer screening – sometimes returns are selected based solely on a statistical formula. IRS compares the tax return against “norms” for similar returns.
- These “norms” from audits of a statistically valid random sample of returns, as part of the National Research Program the IRS conducts. The IRS uses this program to update return selection information. With millions of tax returns with its data base and nearly two centuries of tax experience, they have the tax experience
- Related examinations – The returns get the extra attention when they involve issues or transactions with similar other taxpayers, such as business partners or investors, whose returns were selected for audit. Or the tax- payers commit similar methods to get this extra attention.
One selected for audit gets a written communication from the IRS.
IRS may send you, as a tax payer, a notice or letter if:
- If the tax payer may have a balance due, the refund might have been change or a question might be raised regarding the tax return.
- The letter might have arisen due to need to verify the identity of the tax payer, conveying the information of corrected return or just making the tax payer realize the delay in the process of the tax return.
To get details on an IRS notice or letter, the tax payer may search for it by number or topic. Finding the CP or LTR number on the right corner of the letter leads to more guidance.
What to do if letter is received from IRS?
Some pearls of wisdom from IRS combined with my suggestions. Please do not get panicky. You join the millions of tax payers who did receive similar ones and acted.
From IRS,
“Review it carefully and keep it for your records. If we ask you to respond, act by the due date. What to do depends on your situation:
If you agree with the notice or letter
Take any requested action. You don’t need to reply unless we specifically ask you to.
If you disagree
Follow the instructions in the notice to dispute what it says. Include information and copies of documents for us to review when we consider your dispute.
To guarantee your appeal rights, reply by the due date.
If you have an amount due
Even if you can’t pay the full amount you owe, pay by the due date. This can reduce interest and penalty charges.
If we changed or corrected your tax return
Compare the information in the notice or letter with your return. If you agree, note the corrections on your personal copy of the tax return and keep it for your records.
You only need to take action if we ask for more information, if you have a balance due or if you disagree with the notice.
If you suspect a scam
If the letter doesn’t appear in your search or if it looks suspicious, call 800-829-1040. Follow the IRS representative’s instructions.”
How will the IRS conduct the Audit?
Obviously, audit does consist of the following steps.
The IRS conducts audits either by mail or through an in-person interview to review your records. The interview may be at an IRS office (office audit) or at the taxpayer’s home, place of business, or accountant’s/representative’s office (field audit). Specifically, you will get it by mail.
In case, if it is by mail, information such as income, expenses, itemized deductions shown in the tax return may invite more probe by them by exclusively soliciting more information.
In case of one of my clients, details of LLC partnership were totally verified.
In case, you are not able to show the information by mail, personal meeting can be organized at the office of IRS. The IRS will provide contact information and instructions in the letter you receive.
Interestingly, one is curious to know as how does IRS use the information and what techniques would be useful for them and are they documented?
Depending on the issues in your audit, IRS examiners may use one of these Audit Techniques Guides to assist them. These guides will give you an idea of what to expect.
Audit techniques Guides on various matters, A…..Z are available with IRS with lengthy information easily understandable to your CPA.
What records need to be provided to IRS?
Many tax payers do not provide the required data to satisfy the tax authorities. Getting emotionally affected does not help.
IRS would exactly provide the required records required from you, as a tax payer, either by actual copies or the electronic means.
Please do ensure you have the proof of sending the required information to the tax authorities. Just understand that your ignorance or pretence that the information was sent will need complete documentary reliance.
What are the extra services which meet the expectations of the tax authorities about receipt of the required information from the tax payer?
1.0 Basic Standards for All Extra Services
2.0 Registered Mail
3.0 Certified Mail Services
4.0 Insured Mail
5.0 Certificates of Mailing
6.0 Return Receipt
7.0 USPS Tracking
8.0 USPS Signature Services
9.0 Collect on Delivery (COD)
The explanations for above services are available in the IRS website.
What if the tax payer could ask for more time?
For audits conducted by mail –
If I could reproduce IRS instructions,
Fax your written request to the number shown on the IRS letter you received. If you are unable to submit the request by fax, mail your request to the address shown on the IRS letter.
The tax authorities can ordinarily grant you a one-time automatic 30-day extension. You will be contacted in case of inability to grant extra time.
However, if you received a “Notice of Deficiency” by certified mail, IRS won’t grant additional time for you to submit supporting documentation. You may continue to work with them to resolve your tax matter, but IRS cannot extend the time but you have to petition the U.S. Tax Court beyond the original 90 days.
Now, a relevant question arises. How far IRS can go after you for tax related matters?
Generally, the IRS can include returns filed within the last three years in an audit. If they identify a substantial error, we additional years can be added. IRS authorities usually don’t go back more than the last six years.
The IRS tries to audit tax returns as soon as possible after they are filed. Accordingly, most audits will be of returns filed within the last two years.
If an audit is not resolved, IRS may request extending the statute of limitations for assessment tax. The statute of limitations is a time period established by law when IRS can review, analyze, and resolve tax-related issues.
When the statutory period expires, the tax authorities can no longer assess or collect additional tax, or allow a tax refund. It is generally three years after a return is due or was filed, whichever is later.
Tax returns based on fraudulent information can be looked at for any length of time. No time limitation for IRS.
Publication 1035 Extending Background Tax Assessment Period may be referred for further guidance.
What are your rights as a tax payer?
Publication 1, Your Rights as a Taxpayer, explains your rights as a taxpayer as well as the examination, appeal, collection, and refund processes. These rights include:
- A right to professional and courteous treatment by IRS employees.
- A right to privacy and confidentiality about tax matters.
- A right to know why the IRS is asking for information, how the IRS will use it and what will happen if the requested information is not provided.
- A right to representation, by oneself or an authorized representative.
- A right to appeal disagreements, both within the IRS and before the courts
Yes, I got my audit completed by giving the relevant information for all types of IRS audits.
How does the audit conclude and what can I, as a tax payer expect?
An audit can be concluded in three ways:
- No change: an audit in which you have substantiated all of the items being reviewed and results in no changes.
- Agreed: an audit where the IRS proposed changes and you understand and agree with the changes.
- Disagreed: an audit where the IRS has proposed changes and you understand but disagree with the changes.
- If you agree with the audit findings, you will be asked to sign the examination report or a similar form depending upon the type of audit conducted.
- If you owe money, there are several payment options available. Publication 594, The IRS Collection Process , explains the collection process in detail.
If you disagree with IRS audit findings which you will receive in writing by its communication, you can request a conference with an IRS manager. The IRS also offers mediation – alternative dispute resolution (ADR) or you can file an appeal if there is enough time remaining on the statute of limitations.
This writes up does not constitute a complete cover up of the process but the following information may help further.
- Form 870. Waiver of Restrictions on Assessment and Collection of Deficiency in Tax and Acceptance of Overassessment.
- Form 12203 -Request for appeals review.
- Form 843 (Claim for Refund & Request for Abatement)
- 90-day letter – Notice of Deficiency.
Conclusion
IRS audits are mental wrecking experienceS for any miscalculating tax payers who think they can somehow overtake IRS experience, longevity, or commitment to serve an ordinary taxpayer. Who can calculate the benefits accrued to the millions of taxpayers who have been sincerely served over the decades.
With my personal experience over the decades as a CPA, IRS stands out as one of the best working tax authorities and its audit needs expert handling of a CPA. The laid down procedures as explained above may help.
Caution
The above write up is based upon IRS laid down rules and regulations and do not constitute any tax guidance or legal advice. Please do consult any experienced CPA to tide over an IRS audit.
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