Author: Ryan Hirsch, NASBA Multimedia & Video Services Manager
After a long day of work, you arrive home, open the mailbox and there it is…the dreaded letter from the IRS notifying you that you are being audited.
"Why is this happening? Did I do something wrong? What should I do next?" These are all questions that may cross your mind after an audit notification. But, in reality, if you prepared your tax returns truthfully and to the best of your knowledge, you probably have little to fear. To help ease the anxiety and nervousness that often comes along with an audit, it is helpful to understand the meaning and purpose of an audit.
An IRS audit is basically a process designed to analyze and review the tax returns of a person to ensure that the return is in compliance with state and/or federal tax laws. The IRS evaluates financial statements to determine if all of the information in the tax return filing was reported accurately.
Individuals are often baffled as to why are they are chosen to be audited. Although a specific number of tax returns are randomly selected for audits each year, some returns are chosen based on red-flags that may appear on the tax return. A few examples of claims that would be considered red flags include: charitable contributions that are disproportionately high relative to income, a return with too many round numbers and a reported income level that is drastically higher or lower than a previous year's return. All of these red flags increase the chance of being audited. Many tax preparation programs now provide "audit-risk" features, which assess the risk level for being audited, before filing a return.
By now, you may be wondering what challenges you face if the IRS determines that your tax return information was not filed properly. Generally speaking, if you reported your tax information as honestly as possible, but made a few unintentional accounting or reporting errors, the IRS will simply adjust your refund amount and close your audit case. The people who should be concerned about being audited are primarily those who having knowingly completed fraudulent tax returns. Anyone who lies about their income level, charitable contributions or other tax emptions will likely encounter serious problems, which could lead to charges of tax evasion. But again, if you were honest and truthful in your reporting, your biggest concern is a slight tax refund adjustment.
If you filed your taxes truthfully, but still face an audit, there are several things you can do to prepare yourself. First, educate yourself on the audit process by reading the audit section of the IRS website or by watching the Guide to an IRS Audit video series. Then, respond to the IRS audit notice, which will come in the form of a letter or phone call. If you are contacted by phone, the IRS agent will follow up by sending a letter in the mail. The IRS does not notify taxpayers of audits through email, and any such fraudulent notification should be reported.
After you have responded, the IRS will either schedule an appointment to meet you and review your information, or they will ask you to mail a copy of your financial documents to its office. It is recommended that you make multiple copies to ensure that you have a copy of your records, as well. Prior to the meeting, you'll also want to review your return and be prepared to discuss any questions they may have about your filing. In some cases, the auditor determines that everything is accurate and no changes need to be made. In other instances, the auditor may determine that certain sections of the tax return have been miscalculated or misreported. If this happens, your refund amount may be adjusted to reflect the corrected tax filing.
If you disagree with the findings of the auditor, you do have the option of filing an appeal. You also have the option of obtaining representation in the form of a CPA or other accounting professional before the audit process begins. Tax professionals can often simplify the audit process, and provide helpful information when dealing with complex tax rules and laws.
Other Suggested Reading
- MEMBER CENTER
- Board Member Portal
- Member Products & Services
- Meetings & Events
- Legislative Support
- Board Gateway Access
- PROC Resources
- Enforcement Tools
- NASBA Awards
- ED Login