Dealing with an Audit

Types of Audits:
There are generally three types of audits. Each begins with the taxpayer receiving a letter from the Internal Revenue Service.

Correspondence audit:
The IRS requests that certain information be provided by mail. If it is necessary for you to provide any documentation, be sure that you mail only copies (never originals). If the IRS finds that you owe tax and you don’t agree, you may request an office-audit.

Office audit:
The letter you receive from the IRS will ask you to call for an appointment. The items the IRS is questioning will be listed in the letter. You or your representative will call for an appointment by the date indicated and take the documents supporting your income and deductions to that appointment. At the IRS office, a tax auditor will review these documents and discuss points of law that are relevant to your tax return. If an agreement is reached with the auditor, your case will be closed. If you don’t reach an agreement you may appeal.

Field audit:
This type of audit is normally used to audit business returns. The auditor may come to your home or business to examine all the books and records for that business. A field audit may also be conducted in your Enrolled Agent’s (EA’s) office, an especially good idea if your bookkeeping was done there as well.

How is a return selected for audit?
Normally a tax return is selected for an audit based on a combination of factors including the amount and type of income and deductions. For example, if you operate a business or have rental property, your chances of being audited are slightly higher. In addition, taxpayers with large casualty losses, medical expenses, charitable contributions, or employee business expenses have a greater chance of being audited.

You should never omit legitimate deductions simply because you’re afraid of being audited. First, only about two percent of tax returns are audited and, second, you could still be audited even if you don’t take advantage of all the deductions to which you are entitled.

What should I do if I am audited?
If you get a letter from the Internal Revenue Service about an audit, the first thing you should do is to inform your tax advisor. He or she can advise you on the things that need to be done and the procedures for any type of audit.

For an Office Audit, you will need to gather all the documentation to prove the amount of income you received and the amount and legitimacy of your deductions. You will need to put the receipts and related documents into categories so they can be presented in an organized manner to the auditor. It will not be to your benefit to simply take a large bag of receipts and dump them on the auditor’s desk.

What if I don’t agree with the IRS?
If you don’t agree with the auditor, you have the right to appeal your case using the following procedures: First, you may appeal to the auditor’s supervisor. If you do not reach agreement with the supervisor, you may take your case to the Appeals Division of the IRS. An agreement can often be reached at this level. Appeals officers are often more knowledgeable of tax law than auditors and, if appropriate, want to avoid unnecessary litigation. If you don’t agree with the appeals officer, the IRS will issue a Statutory Notice of Deficiency. You have 90 days from the date this notice is issued to file a Tax Court petition and have your case heard. To do this you do not need to pay the tax in question. Depending upon the amount owed, you may elect to file your case in Small Case Tax Court where an attorney is not needed. Otherwise, you would file your case in regular Tax Court. As an alternative to Tax Court, you may pay the amount of tax in question and file a suit for refund in either a U.S. District Court or U.S. Claims Court. Most cases are settled before they reach the Tax Court. An EA or CPA can handle your case from the audit through the appeals process, up to the point where you elect to file in Tax Court, the U. S. District Court or U. S. Claims Court.