IRS AUDITS: THE FOUR MAJOR KINDS OF TAX REVIEW
Tax return preparation is a prelude to an IRS audit. When we prepare a return, we have a simple question in mind: “Can we defend this return if there is a review?”
We can never guarantee that the IRS will not send a notice, regardless of how the return is prepared. The IRS review process can be random or targeted. However, what happens if there is a review?
Read below or contact us to discuss your situation now.
IRS CORRESPONDENCE AUDITS:
Most taxpayers will never see a revenue agent when an audit happens. What typically happens is that a taxpayer will receive a “CP2000” in the mail. The letter is a request for clarification about specific items on the tax return. These inquiries tend to be very focused.
The most common situation is a discrepancy between information on the return and what was reported to the IRS by third parties that send out W-2s, 1099s, and similar reporting forms. For example, the taxpayer reports a total amount of income for their business on a Schedule C. The IRS receives income reports based on the 1099-MISC forms sent to the taxpayer. The notice from the IRS is asking for clarification and proof that all the income was correctly reported.
If there are more questions about a tax return, the taxpayer may get a letter “inviting” them into an IRS office for the audit. These types of audits are more serious. Taxpayers can have a tax professional represent them at these types of audits.
If a taxpayer attends the audit they often want to be “helpful.” By doing this, taxpayers may provide more information than is required, or they might misrepresent an item that was not originally in question.
It is our advice that the tax professional attends the office audit on behalf of the taxpayer. When tax professionals represent the taxpayer, examinations tend to remain focused. The IRS auditor stays targeted on what initially was being reviewed. It avoids fishing expeditions or other possible missteps that may lead to unnecessary additional inquires.
The field audit is a more serious form of review. Field audits are typically not the first contact between the IRS and the taxpayer.
The IRS is requesting to visit a taxpayer’s office or home. A taxpayer needs to be represented in the field audit to protect their rights. In most cases, it is recommended that the taxpayer not be present.
The random audit may be the most intimidating. These are generated from a random sampling of returns. In these audits, the IRS is not looking for anything specific.
A letter is sent to random taxpayers, indicating the IRS will be reviewing their return. It could be about a relatively minor item, or they may review the entire return. The IRS is looking for tax revenue, and these audits tend to encourage compliance in reporting everything on the tax return. That is why these are also called “compliance audits.
The level of seriousness for all audits will vary. The best way to prepare is to be organized with the receipts that are used to prepare the tax return.
If a return is selected for an audit, it is most likely that the notice will not be sent out for six months to one year after the return is filed. The time delays are one reason why keeping good records, stored in a secure place, is so important. Digital documents with PDF, image files, and spreadsheets are useful. They should be easily retrieved and organized. These are keys to successfully representation in an audit.
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