Just the mention of Internal Revenue Service (IRS) audits can strike fear in the hearts of most people. While some audits are fairly easygoing, others can be downright burdensome. In today’s blog, I’ll be covering the basics of what audits are and how the IRS functions to put you at ease. Once you know what kind of tax audit is being conducted, you’ll have a better sense of what’s involved.
There are three categories of audits: correspondence audits, office audits, and field audits. The first kind, the correspondence audit, is handled through the mail, as the name suggests. The simplest type is a letter from the IRS to claim that you owe money to the government. While this is not technically an audit, failure to resolve it can turn into one. These letters can result from a math error on your tax return or an omission of income on your tax return that’s been reported to the IRS on another form. The second letter that you may get from the IRS is an audit letter that asks for certain documents to support a deduction or other position taken on your return. This is a real though small audit and can be resolved by mailing in the requested proof.
In the case of an office audit, the IRS asks to interview you in person regarding specific items on your return. Compared to the correspondence audits, this is a step up in terms of seriousness and might be closer to what comes to mind when you think of an audit. An audit may result in no change in return, in a finding that you owe taxes, or it may even result in a finding that the IRS owes you a refund. The initial determination by the IRS agent is not necessarily final, and you have the right to appeal it.
The third type of audit is a field audit. In a field audit, the IRS comes to your home, your place of business (if you’re the owner), or your accountant’s office. This audit is not limited to specific terms, but fortunately, these are very rare for individuals. If you’re selected for this type of audit, it’s highly recommended that you have a tax professional like an attorney by your side.
The most dreaded audit of all, however, is the line-by-line audit. These only occur once in a while under the National Research Program, during which taxpayers are chosen at random to have every line on their return examined. These serve the purpose of giving the IRS data used to conduct future targeted audits, but people who go through them may owe additional taxes, interest, and penalties.
The bottom line, though, is that your chances of being audited are slim. In 2018, only 0.59% of individual returns were audited, though the risk is higher for people whose income is greater than $100,000. With IRS budget and personnel constraints, it’s likely that the chances of being audited are going to be lower in the future. Should you find yourself being audited, know how they work and your rights in the process.