IRS Audit? What Does It Really Mean to be Audited?
IRS Audit? What does it mean to be audited? Most people think of the word “audit” as one of the worst five letters words in the English language. But in many cases, the fear of it is actually worse than the audit itself. It helps if you understand your rights as a taxpayer.
An audit is basically a review or examination of your tax information to ensure that the return has been correctly reported. This process verifies that the proper amount of tax is paid. Looked at another way, it’s just another level of review with the intent to keep the whole system fair. If you reported your information correctly and kept good tax records, you have nothing to worry about during this process.
When talking with people who have been hit with the dreaded audit, these are some of the common myths that showcase the fear and misunderstanding of the process:
Myth #1: The IRS is out to get me.
The IRS uses many different methods to select a tax return for being audit. Most of them are the result of a computerized review process, which likely has no bias against you personally. The IRS uses an analytical software program that flags returns that could be incomplete or inaccurate while other programs flag returns through random selection.
Mismatched information on your tax return is one of the easiest ways to invite an audit. For example, your W-2 or Form 1099-Misc are held or sent to three parties – yourself, your issuer or employer, and the IRS. If you report numbers that don’t match what was sent to the IRS, you will likely receive a letter asking for an explanation of the difference. This means if you are issued any forms that are incorrect, it is best to have the form fixed by the issuer as quickly as possible. A corrected copy will be sent to the IRS reporting the proper information which hopefully solves this mismatch issue.
Lastly, it is possible another taxpayer’s audit could affect your tax return. For example, a K-1 you received from a partnership and reported correctly on your return actually may be revised due to an audit of the partnership. This type of audit is mainly designed just to ensure complete and accurate reporting of information across the returns that affect each other.
With all of these situations, the most common type of individual tax return audit is a “correspondence audit,” where the IRS will ask you to send in supporting evidence and documentation by mail. In rare cases, the IRS will ask you to come into a local IRS office for a review of the return, which is known as an “office audit.” In extremely rare cases, the IRS will conduct a “field audit” where an IRS agent will review your tax records on-site.
Myth #2: Pay up – or else.
An IRS letter is not necessarily a bill. You must remember the purpose of the audit is merely to review the forms you sent in and ask for more information. The fact that you received a letter means you have some work to do to show that what you reported on your return was right. You may not need to break out your checkbook if you can show that your tax return was properly reported originally. It only becomes a bill if you agree with the proposed changes, fail to respond to the notice in a timely manner or fail to produce records in support of your original reporting.
To ensure your IRS letter does not become a tax bill, you must send in documentation showing that you were entitled to claim all the income, deductions and credits you reported.
For example, assume that you claimed the Earned Income Tax Credit (EIC) for a qualifying child. The IRS may send you a letter requesting medical or school records with your child’s address to prove that the EIC residency test has been met for your qualifying child. If you cannot prove that requirement, that letter will show the amount of EIC for which you were ineligible, and the amount that must be repaid. If you are unable to provide that information, that letter could become a bill. But if you have maintained your records and properly claimed the credit, this audit would only be mildly inconvenient until you send the requested documentation and records. Also remember that when sending copies of information to the IRS, you should use certified mail so that you have confirmation that the information was received by them.
Myth #3: Now is not the time to deal with this.
If you receive an audit or letter requesting information from the IRS, now is exactly the time to deal with this. First of all, please don’t panic. However, you need to understand that if you miss the deadlines stated in your letter, you could be relinquishing your rights to prove what you originally reported was correct and to dispute any additional taxes due. Read your letter carefully to see how long you have you have to respond, and start going through your documentation immediately. The IRS provides more information about the audit process on its website.
Hopefully by now you understand that if you receive a letter after being audited, you have rights and can read the letter a bit more calmly. You must review it immediately to see what additional documentation, if any, is needed to prove your side, but if you have good records and are confident your return was properly reported, you should have no problem quickly resolving any potential tax dispute.
Being audited is scary — Let Richard Schickel help you with your IRS problem. Call him today 520-448-3531