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Phil Hogan, CPA, CA, CPA (CO)
Cross-Border Tax and Investment Specialist
If you’ve received notice that the IRS is going to conduct a review or audit of one or more of your tax returns, you may experience several emotions, ranging from fear to guilt to even anger for apparently being singled out, but with a little more information you may find that going through a an IRS tax audit or review can be a lot more manageable than you think. Here we have compiled answers to some of the most frequently asked questions to help you breathe a little easier.
How Are Audits Conducted?
IRS audits, or IRS examinations as they are also called, are conducted in one of three ways. For returns that are just missing basic information—names, signatures and other non-financial omissions or mistakes—written correspondence with the filer, generated from the IRS main office in Ogden, Utah, is usually the audit method employed. For other problems with your return, including questions about income declared, tax underpayments and exemption declarations, the return is forwarded to the district office in your area where it is subjected to either an office examination or field examination. According to the IRS, most audits—90% in fact—are handled as office examinations.
Contrary to popular myth, the process of deciding which returns are singled out for auditing is not random or subjective. While it is certainly true that not all mistake-laden returns will be audited, it is also true that those returns which are audited have probably been singled out for a reason. According to the IRS, “more than 95% of personal tax audits occur as a result of statistical review using a complex scoring process, known as the DIF score, which examines returns and quantifies them based on statistical probability of tax understatement.” Thus, those having very large gross incomes are often selected in relation to the number of exemptions claimed on the return. Failing to report all income or the omission of W2s may also result in a personal audit. In the majority of cases there is no reason to become upset over an audit or review. Everybody makes mistakes, and unless you consistently file a very simple return each year, chances are you will undergo at least one audit during your lifetime.
What Do I Need to Bring to an Audit?
If the IRS needs additional information from you, they will often simply ask you to mail it in to their offices, but in some cases you may be required to attend an appointment at the local IRS office. Typically the IRS will send you a reminder notice for this appointment, and included in this reminder will be the items they want you to bring with you. These can include your social security card, ID, W2s, paycheck stub and copy of your tax return. For expediency in resolving your review, bring each item, and ONLY those items referred to on the appointment notice.
Do I Need Representation?
Naturally, you are well within your rights to be represented at an IRS audit or review, but representation can be quite expensive. Representation by a tax attorney, a Certified Public Accountant, a Chartered Accountant, your tax preparer or an IRS enrolled agent is probably wise if you feel uncomfortable “going it alone” for fear of legal ramifications, or if you are unable to attend the audit yourself, but if your audit is nothing more than a simple clarification of errors it would make more financial sense to deal with the audit independently.
What Will Happen as the Result of My Audit?
Simply speaking, once the audit is concluded, and the IRS deems that you owe additional tax for a given tax year, you can either agree to pay that amount, whether in full or by requesting a payment plan in which you will also have to pay additional interest at a rate of 9% per annum, or you can disagree with the auditor’s findings and file an appeal within 30 days. The appeals process is handled by experienced IRS agents who will carefully weigh your case and render a decision. If after appeal you are still not satisfied with the IRS’s findings you can take the matter to tax court where the final disposition will be rendered by a judge.
Does One Audit Mean I Will Be Audited More Frequently in the Future?
Due to the nature of the IRS scoring system, the probability of having your returns audited in the future can be difficult to determine, but if the same types of issues arise–issues which set the first audit in motion—the probability of having future returns audited is very high. If no issues arise, however, the probability for another audit is no higher than it was initially.
Experiencing an IRS audit or tax review can be an upsetting experience, but for those who meet the challenge head on—provide the necessary documents, meet appointments and cooperate fully—the audit can usually be handled rather quickly and painlessly.
If you need help in dealing with your IRS audit please feel free to call me at 250-661-9417 for a free consultation or email me here.