Received an IRS audit letter? Don’t worry, an IRS audit doesn’t necessarily mean you’ll owe more taxes. The IRS will randomly select only a few percent of tax returns to audit using a statistical formula that compares your tax return to similar returns for irregularities.
For example, a single parent with two dependents files a return that uses the Earned Income Tax Credit (EITC) benefit to receive a $3,000 refund. This refund amount is within the average for others claiming EITC.
Another single parent with two dependents files a return with EITC that results in a $7,000 refund. Since this refund amount exceeds the norm, this individual may be flagged.
It’s not just Earned Income Tax Credit. Other “red flags” are IRS audit triggers too, such as not reporting all taxable income, reporting large charitable contributions, or filing Schedule C when self-employed.
Types of IRS Audits
IRS audits fall into two main categories. The first type is an audit by mail, called a correspondence audit. The second type is a face-to-face examination, either an office audit or a field audit.
Correspondence Audit
If an auditor finds issues with your tax return that aren’t egregious, you’ll likely receive an audit letter in the mail asking for more information about the tax problem or discrepancy. In most cases, a correspondence audit consists of the IRS requesting additional documentation to support your income, deductions, and expenses (especially write-offs).
Examples of documents requested by the IRS for a correspondence audit by mail include:
- Receipts related to a business or self-employment
- Canceled checks
- Bills/proof of payment
- Divorce/custody papers
- Loan agreements
- Medical documents
- Insurance claims detailing loss or theft events
Office Audit at Your Local IRS Office
When a correspondence audit doesn’t resolve what the IRS considers significant issues with your tax return, you will receive a letter in the mail requesting you talk with an auditor at the IRS office closest to your location. Since an office audit is more serious (and potentially more complex) than a correspondence audit, tax attorneys recommend taking your accountant or tax preparer (if applicable) along with you.
Office audits generally involve a couple of specific tax return problems that have been found by the IRS. The written notice sent to taxpayers requesting an office audit will contain information describing what those problems are to allow the taxpayer to gather supporting documents,
Publication 556 provides more details about office audit procedures.
Field Audit at Your Office or Home
Field audits are the most serious. If you are contacted about a field audit, this means you’ll be visited by IRS agents at your office or home. Field audit agents aren’t looking to review basic documents requested for correspondence or office audits. They want to see very specific documents associated with something significant they’ve found and need much more information about.
Typically, field audits are reserved for high-income earners and large business owners. They can take one day to complete or as long as a week. IRS field audit agents are professional accountants who have more knowledge about tax rules than most IRS representatives. Business owners may even find IRS agents searching their office(s) to gather more information regarding tax problems they uncovered on your return.
How Does the IRS Determine Whether an Audit is by Mail or In Person?
When the IRS believes a taxpayer has made an honest mistake that can be quickly addressed, that taxpayer will receive a correspondence audit. People making less than $100,000 a year who have never had issues with the IRS are more than likely to be recipients of a correspondence audit letter.
Alternately, if the IRS receives a complicated tax return from a high-income earner that contains multiple, suspicious claims or errors, the IRS will probably request an office or field audit.
Owning your own business or professional practice, having numerous financial and international investments, or claiming unusual business expenses as write-offs on your tax return are some of the details the IRS looks for when considering an in-person audit.
How Do You Know When an IRS Audit is Finished?
Providing the IRS with proper documentation that substantiates the financial claims you reported on your return will result in the IRS sending a letter indicating the audit is complete. Another way an audit can conclude is when the IRS wants you to change something on your return and you agree to the change.
Of course, if you don’t agree with the changes the IRS wants you to make, you can file an appeal with the IRS.
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