Tax Audits Explained
What are Tax Audits?
A tax audit is when the Government decides to examine your tax return and verify that your income and deductions are accurate. Typically, your tax return is chosen for audit when something you have entered on your return is out of the ordinary. There are three main types of IRS audits: the mail audit, the office audit and the field audit.
Mail audits No matter what type of audit the IRS decides to conduct, you will receive notification of it by mail. A mail audit is the simplest type of IRS examination and does not require you to meet with an auditor in person. Typically, the IRS requests additional documentation to substantiate various items you report on your tax return. For example, if you claim $10,000 in charitable deductions, the IRS may send you a letter requesting proof of your donations. Generally, submitting sufficient proof will conclude the audit in your favor if the IRS is satisfied.
Office audits An office audit is an in-person audit conducted at a local IRS office. These audits are typically more in-depth than mail audits and usually include questioning by an audit officer about information on your return. You will be asked to bring specific information to an office audit, such as the books and records for your business or your personal bank statements and receipts. You also have the right to bring an accountant or lawyer to represent you at these meetings.
Field audits The field audit is the broadest type of examination that the IRS conducts. In these cases, an IRS agent will conduct the audit at your home or place of business. Generally, field audits are conducted when the IRS is questioning more than just a deduction or two. A field audit is generally very thorough and will cover many, if not all, items on your return.
Possible outcomes of an audit There are three possible outcomes of an IRS audit. If the IRS is satisfied with your explanations and the documentation you provide, then it will not change anything on your tax return. If the IRS proposes changes to your tax return, you can either agree and accept the changes or challenge the agent's assessment. If you agree, you will sign an examination report or other form provided by the IRS and establish some type of payment arrangement. If you disagree with the findings, you can set up a conference with an IRS manager to further review your case or you can request a formal appeals conference.
Penalties Depending on the nature of the tax underpayment, you may face one of the following penalties:
20% Penalty - This generally applies to the portion of any tax underpayment associated with overvaluation or undervaluation of property, negligence, disregard of IRS rules and regulations, and substantial understatement of tax liability.
75% Penalty - This typically applies to more serious tax underpayments that are due to fraud. If the IRS determines that any portion of the underpayment is fraud related, it will be your responsibility to prove otherwise. Otherwise, the entire underpayment will be treated as fraudulent and subject to a 75% penalty.
Interest Due - For violations such as fraud, negligence, failure to file on time and over or undervaluation of property, interest will accumulate from the due date of your return (including extensions) until the date the penalty is paid. For other penalties, interest is not charged if the imposed penalty is paid within 21 days (for penalties under $100,000).
Prison - In the most serious cases of tax evasion and other tax crimes, a conviction can result in much more significant fines, the forfeiture of assets/property and possibly incarceration.
Right to Representation Success in a Tax Audit depends on your understanding of very complex Tax Laws. Every taxpayer has the right to retain an authorized representative (Tax Attorney or Tax Accountant) of their choice to represent them in their dealings with the IRS.
In most situations the IRS must suspend an interview if you request to consult with a representative. At hearings and interviews the IRS cannot require that you attend with your representative, unless it formally summons you to appear.
If you are under a tax audit or have a tax problem that is too big to handle on your own, contact THORNTON Tax Firm today.