What to Do if You Are Audited
If you receive a letter informing you that you are being audited by IRS or a state taxation office, you may have a number of questions.
Why was my return selected for an audit? Were there “red flags” that drew unwanted attention?
Contrary to popular belief, the IRS rarely audits people because they think there’s something wrong with the tax return. At least 95% of tax audits occur as the result of an objective, statistical review of returns.
IRS looks for particular items on returns that statistically have a higher than average chance of tax understatement, often returns with a Schedule C (sole proprietorships) or those with large expenses in relation to income. Once selected on this basis, an IRS agent reviews the return and will assign the return for an audit if questionable items are noted.
Do I have to go to the audit in person?
Again, contrary to popular belief, not all audits are conducted in person. Some audits are conducted entirely by mail. In that situation, the IRS letter will request additional information about certain items shown on your tax return, such as particular income items, or particular deductions or expenses.
If the audit is in-person, it may be conducted at the IRS office or at your business location, where the business records are located. If IRS wants to hold the meeting at your business location, it may not agree to a request to transfer the audit to the IRS office.
If you hire Diehl & Weger to represent you in the audit, we usually request that the audit meeting is held at our office, and you usually do not need to be present at the meeting. We will meet with you in advance and help you to gather and organize the necessary information. If the examination is held in our office and if the examiner requests additional information to support the return, we will relay the request to you so you can locate the proper records. Your goal is to cooperate fully and respond promptly with all required information. However, it’s also advisable to respond only with that information—don’t risk opening issues unnecessarily by volunteering information.
IRS examiners are generally fair and reasonable; however, it is their job to make certain that all your income is reported and that all of your deductions are supported by adequate documentation. If they have reason to believe that other areas of your tax returns are suspicious, they are allowed to extend the scope of the audit.
Although the examiner will usually look only at one tax year, the examiner also has the discretion to extend the current examination to subsequent tax years. In our experience, this is more likely if the examiner finds that your records are incomplete and that expenses should be disallowed as a result.
The examiner issues an audit report that may result in more tax being owed, plus interest and penalties. However, during the audit you may also submit documentation to support additional deductions which can be used to offset the amounts owed, or even result in a refund to you at the end of the process.