Receiving notice that you’re being audited by the IRS may send you spiraling into a panic. Take a deep breath.
Experts note that there are strategies taxpayers can use to navigate the system, separate real IRS audits from scams and maximize their chances of a favorable decision.
“The purpose of the audit is to determine that the (tax) return is substantially correct,” says Alan Pinck, enrolled agent and National Tax Practice Institute fellow who owns his own tax preparation business in San Jose, California. At the end of the audit, one of three things is going to happen, Pinck says: Either you will owe the government money, the government will owe you money or the auditor will accept the tax return as originally filed. “Unless you do something, or did something, really stupid during the process, nobody goes to jail,” he says.
Still feeling stressed? Here’s what to know about surviving a federal income tax audit.
How Common Are IRS Audits?
Tax audits, or examinations, aren’t terribly common. In fiscal year 2018, just 0.6% of all individual income tax returns were audited, according to the IRS. The likelihood that a taxpayer would be audited in that year was smaller for low- and middle-income filers and higher for those earning $200,000 or more.
But that low likelihood doesn’t give taxpayers free rein to claim whichever tax credits and deductions they’d like. The IRS will contact you if there are discrepancies between your tax return and the paperwork it has received from your employers, brokerage firms and other sources. It may also initiate an examination if auditors spot certain red flags that could trigger a tax audit. Those may include failing to disclose taxable income, neglecting to report cryptocurrency transactions, making typos or using lots of round numbers.
How Will I Know if I’m Being Audited?
If you’re being audited, the IRS will reach out via mail. “It’s not going to be a phone call. Everything is going to be in writing,” says Morris Armstrong, an enrolled agent in Cheshire, Connecticut.
If you receive a text, email or phone call purporting to be from the IRS and threatening to arrest you if you don’t pay taxes, you’re almost certainly dealing with a scammer, experts say. A real auditor is “not going to text you, they’re not going to email you, they’re not going to threaten to throw you in jail,” Pinck says.
Once you receive notice you’re being audited, don’t ignore it, experts say. Pretending that it doesn’t exist won’t make the audit go away. In fact, ignoring an IRS audit could eventually cause you to owe additional taxes and your bill to go to collections. It could cost you more in penalties and fees down the line. So it’s time to start hunting down supporting documents and potentially seeking out a professional to represent you.
What Is the Procedure for an IRS Audit?
The IRS can initiate three types of audits:
- Correspondence audit. Conducted via writing and not face to face with an auditor. In fiscal year 2018, nearly 75% of audits were conducted via correspondence, according to the IRS.
- Office audit. You’ll generally have to meet with an auditor in person, Pinck says. Expect to meet at an IRS office and for the experience to last between two and four hours.
- Field audit. The auditor may come to your place of business or records office. Expect this to last a day or longer.
Depending on the type of audit, the taxpayer or her representative will use different strategies to navigate it. The initial correspondence will often confirm which parts of your tax return are being questioned.
When it comes to communicating with the auditor, only answer the questions you’re asked, whether it’s in an in-person audit or via written response, experts say. Try to limit rambling and kill the urge to divulge too much. “Do not give them any more information than you have to,” Pinck says. “If they ask you a yes-or-no question, answer ‘yes’ or ‘no.'”
If you’ve hired a professional to help you navigate the audit, you will likely sign over power of attorney, and you may never even speak to the auditor – your representative will do that for you.
How Far Back Can the IRS Audit?
Generally, the IRS can audit returns filed in the last three years, but if it identifies a substantial error, it may look back further, typically no more than six years, according to the IRS. This is why it’s important to keep records and supporting tax documents stretching back at least three years, Pinck says. You may be asked to supply them during the audit.
Should I Hire a Professional?
Whether or not to hire a professional to represent you is your choice, experts say. But many say it can be worth the cost in all but the most straightforward audits. “It’s really important to get an experienced representative in any situation other than a simple scenario,” says Lance Christensen, certified public accountant and tax practice leader and partner at Margolin, Winer & Evens in Garden City, New York.
If you decide to hire a tax professional, consider hiring an expert such as an enrolled agent, certified public accountant or attorney who specializes in audit representation. “Most of the time, auditors would want to work with a tax professional because we talk the same language,” Pinck says. If you worked with a tax preparer in filing your tax return, share the audit notice with him or her.
Some tax software companies offer audit defense for a fee as a kind of insurance policy in case you get audited. If you do, tax professionals may be on retainer to help navigate the system.
Remember that you have rights when you’re being audited by the IRS, Pinck says. Those include the right to professional treatment by the IRS auditor and a right to representation. You also have a right to appeal within the IRS and the courts.
Finally, a word to the wise: If the result of an audit is that you owe additional tax to Uncle Sam, it may also impact your state return, Pinck says. Look into amending your state return as soon as possible to limit fees and penalties.