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TAX AUDIT FAQ's
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TAX AUDIT FAQ's
Can I Survive an Audit?
Yes, you can survive an audit. There’s nothing worse than receiving a letter from the IRS stating your return will be examined. But, by knowing what the IRS agent will do, what he will look for and proper preparation the scales can be tipped in your favor. To assure the best possible results, retain a representative fully versed in tax law and experienced in handling audits.
The letter from the IRS will outline the specific items on your tax return that they will examine. In all examinations the examiner will want to see fourteen months bank statements and canceled checks. The examiner will also want to examine any records, receipts and credit card or loan statements relating to the specific areas being examined.
The examiner will first try to find any hidden income. This is a standard action all examiners do regardless of the specific items being examined. Your representative will know how to prepare for this step.After an income analysis the examiner will examine the specific items in question. She will add up your receipts for the item and ensure those specific deductions were not overstated.
The IRS allows reconstruction of your income and expenses based on economic realty (income you reasonably would have made and reasonable expenses you would have had to support yourself and/or family) and on "Industry Standard". If you are a self-employed plumber they have statistics on the average income and expenses for self employed plumbers and will use those statistics as a guide.
Income is reported on tax forms such as W2 forms (for salaried employees) and 1099 forms (for independent contractors). Interest income you received and mortgage interest you paid is also reported to the IRS, as well as money you received when selling stocks or bonds. The examiner will compare the reported income from these sources with the income reported on your tax return.
No. If the examiner finds discrepancies in the deductions compared to the proof you supply then she can request further documentation, but she cannot go beyond the scope of the original examination letter without notifying you in writing and must have cause to do so. An experienced and knowledgeable representative would argue this point on your behalf.
If the disallowance is unwarranted, an experienced and knowledgeable representative would either ask for a review by the group supervisor or appeal the findings.
No. The statute of limitations to examine a tax return is three years from the date the return was filed, or the date the return was due (whichever is later). If you normally file on time (April 15th) then a tax return for 1995 filed on April 15th 1996 cannot be examined after April 15th 1999. However, if you filed your 1995 return on January 3rd 1997, the statute will not run out until January 3rd 2000 (three years from date of filing).
The statute is three years from date of FILING. If you did not file then the tax return will be prepared for you by the IRS and can be audited indefinitely. Please also see Unfiled Tax Returns.
If the examiner determines that you understated your income or overstated your deductions she will adjust your taxable income and you may owe additional tax, interest and penalties. However, if all the items being reviewed are substantiated then your tax return will be accepted as filed and you will get a letter of "no change" meaning no adjustments were made.In some cases, if your representative is experienced and prepares for the audit completely, deductions can be found that were never taken on the original tax return which would result in a refund to the taxpayer.
Of course the IRS will want you to pay right away, and if you have the money you should pay it and avoid additional interest and collection actions. If you can’t pay the additional tax you can have your representative arrange a monthly installment agreement. Interest will accrue while you are making your monthly payments.
No. Once the year being examined is "closed" (examination is complete and any adjustments made) that same year cannot be reopened.
If the audit results in adjustments where you owe additional tax then the chances of other years being examined increases greatly. Generally, If there are no adjustments and your return is accepted as originally filed (a "no change") the IRS will not audit those same items for several years. If you receive an examination letter for an earlier or later year after a "no change" your representative can call the IRS office and argue the need for another examination.
The IRS could pursue Criminal prosecution in cases of extreme fraud. Fraud would include supplying the examiner with fraudulent documentation to "substantiate" a deduction.
No. There are ways to reduce the chances but there is no foolproof method to guarantee never having your tax returns examined. See the section "How to Avoid an Audit" for more information.Audit Representation How to Avoid an Audit
Taxpayer Rights - IRS Publication 1
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