Elmer McDuffy: What Is A Tax Audit?

One
day, you get a letter in the mail from the IRS, hoping to discover a tax refund
in the envelope. You carefully read the letter stating that your tax return has
been selected for examination. In other words, your tax return is being
audited. You’re thinking the nightmare of filing taxes hasn’t ended. However,
tax audits come in different types and forms. Read on to learn about IRS tax
audits and discover how to handle them.

Tax Audit: The Basics

A tax
audit is a formal examination conducted by the IRS to verify information or
uncover fraud and inaccurate tax returns. The IRS selects tax returns to
examine both randomly and intentionally. If the audit is selected randomly, the
IRS will simply take a closer look to make sure all information are accurate.
The IRS will intentionally audit certain tax returns if there are issues,
errors, or possible frauds in reporting the tax return.

The
IRS sends out audit notification letters by mail for the following several
reasons: (1) you have a balance due, (2) you are due a larger or smaller
refund, (3) the IRS has questions about your tax return, (4) the IRS needs to
verify your identity, (5) the IRS needs additional information, (6) the IRS
changed your tax return, or (7) the IRS needs to notify you of delays in
processing your return.

Tax
audits can be broken down into four different types:

Correspondence
Audit: This is the least serious type of tax audit. A correspondence audit
refers to the IRS request of additional information to verify the accuracy
or details of your tax return.
Office Audit: An
office audit refers to the in-person interview with an IRS manager to
process your audit. To avoid making statements that can be used against
you, it’s highly advisable to consult with an attorney or a tax
professional before you attend the interview.
Field Audit:
This is the most serious type of audit because the IRS agents will visit
you at home or business. They may ask to see things that are related to
the tax you’ve reported.
Random Audit: As
mentioned above, tax returns can be randomly selected for an audit. A
random audit is made without any particular reason. The IRS auditor will
review the entire tax return to make sure the information was entered
correctly.

How To Handle Your Tax Audit

For
all types of audits, the IRS begins the audit process by sending a notification
letter to the taxpayer. If you’ve received a notification letter, you should
first read the letter carefully. The letter should contain important
information, such as the reason why your tax return is being examined, specific
steps to follow, and a deadline to reply.

Then,
prepare yourself to resolve the issue by researching the law and gathering
information. Don’t feel rushed to contact the IRS to respond to the letter. Any
information you give to the IRS may be used against you. If you need more time
to gather information or prepare yourself to respond, you can submit a written
request to the IRS by fax or mail to get a one-time 30-day extension. However,
if you’ve received a “Notice of Deficiency” in the mail, the IRS
won’t grant you an extension.

There
are three possible ways of concluding an audit. First, an audit can conclude
without making any changes. In this case, the IRS accepts the documents or
information you’ve submitted, which results in no change to your tax return.
Second, the IRS can propose a change to your tax return, and you may agree to
those changes. Third, you may disagree with the proposed change made by the IRS
and request a conference with an IRS manager to challenge its assessment.

Taxpayer Rights

Taxpayers
have the right to know what steps to take to comply with the tax laws. The
Taxpayer Bill of Rights requires the IRS to provide taxpayers with clear
explanations of the laws. There are several rights, which apply to tax audits
as well. The IRS informs its employees and the taxpayers that the taxpayers
have the following basic rights:

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