There are very few people who receive an IRS audit letter, but if you do, then, don’t panic. There is surely a good reason why. If you are totally honest when filling out your tax return, your audit can likely be handled with relative ease.
What is an IRS Audit?
An IRS audit is a review/examination of an organization’s or individual’s accounts and financial information to ensure information is reported correctly according to the tax laws and to verify the reported amount of tax is correct.
How to Identify an IRS Audit Letter
Just because you receive a letter from the IRS doesn’t mean you’re being audited. In many cases, the IRS will send a letter simply asking for additional information or clarification of details listed on your tax return.
An IRS audit letter will come to you by certified mail. When you open it up, it will identify your name, taxpayer ID, form number, employee ID number, and contact information.
The first line of text within your letter from the IRS may state something along the lines of “Your (state or federal) income tax return for the year shown above has been selected for examination.”
Your letter will also reveal the primary focus of the audit and what documentation you need to provide to resolve it.
In most mail audits, the IRS requests receipts or documentation to prove the item in question on your return, as well as an explanation of your circumstances that led to the filing.
Determine How You’re Being Audited
There are a few types of IRS audits, each with unique requirements. Understanding how you are being audited can help you determine what documents you need to gather and where to send them.
Correspondence Audit: The IRS requests additional information regarding a part of your tax return, such as receipts or canceled checks.
Office Audit: The IRS requests that you bring specific documentation into your local IRS office, where your audit will be conducted.
Field Audit: An IRS agent shows up at your place of business to conduct a face-to-face audit.
Taxpayer Compliance Measurement Program Audit: The purpose of this audit is to update the data used to write the computer scoring program used by the IRS. In this case, an extensive examination of your tax return takes place, and every item must be substantiated by documentation, including birth and marriage certificates.
Why am I Being Selected for an Audit?
The selection for an audit does not always suggest there’s a problem. The IRS uses several different methods:
Random selection and computer screening – sometimes returns are selected based solely on a statistical formula. IRS compares your tax return against “norms” for similar returns. They develop these “norms” from audits of a statistically valid random sample of returns, as part of the National Research Program the IRS conducts. The IRS uses this program to update return selection information.
Related examinations – IRS may select your returns when they involve issues or transactions with other taxpayers, such as business partners or investors, whose returns were selected for audit.
Next, an experienced auditor reviews the return. They may accept it; or if the auditor notes something questionable, they will identify the items noted and forward the return for assignment to an examining group.
How to Create an Audit Response Letter
Your actions before, during, and after your IRS audit will determine your compliance with the government.
Respond as soon as possible with either a phone call or an audit response letter—you will have 30 days to do so without a penalty. If you choose to write an audit response letter, here are some tips.
Include the following: Tax ID number, full name, contact information, employee ID, business ID (if applicable), and the name of the IRS officer who is in charge of your case.
Address each finding issue that the IRS stated in your audit letter.
Provide any and all related documentation attached to your letter.
Request a time and date to meet and resolve the finding issues.
The best thing to do when receiving an IRS audit letter (by certified mail) is to contact a tax professional.
A CPA or tax attorney will know exactly how to handle your unique circumstances and reasons for the audit. These response letters need to be flawless; if done correctly, they can resolve an audit quickly and stress-free.
How will the IRS Conduct my Audit?
The IRS manages audits either by mail or through an in-person interview to review your records. The interview may be at an IRS office (office audit) or at the taxpayer’s home, place of business, or accountant’s office (field audit).
Note that, you will be contacted initially by mail. The IRS will provide all contact information and instructions in the letter you will receive.
Depending on the issues in your audit, IRS examiners may use one of these Audit Techniques Guides to assist them. These guides will give you an idea of what to expect.