IRS Audit

What Really Happens In An IRS Audit?

Receiving a notice from the IRS about an audit can be a nerve-wracking experience for many taxpayers. Understanding what happens during an IRS audit and how to prepare can help alleviate some stress and ensure you are ready to handle the process effectively. This guide will walk you through a tax audit, the process, the required documentation, and what to expect during and after the audit.

What Is a Tax Audit?​

A tax audit examines your tax return by the Internal Revenue Service (IRS) to verify that your income and deductions are accurate. The purpose of an audit is to ensure that your financial records match what you reported on your tax return and to check for any discrepancies or errors.

Common Triggers for an IRS Audit​

Understanding what might trigger an IRS audit can help you avoid some common pitfalls. Here are a few factors that can increase the likelihood of being audited:

Unreported Income

Failing to report all your income is a significant red flag for the IRS. Ensure that all income, whether from regular employment, freelance work, or investments, is accurately reported on your tax return.

High Deductions in Comparison to Income

If your claimed deductions are disproportionately high compared to your income, the IRS may take a closer look. While legitimate deductions are fine, be prepared to provide documentation to support them.

Frequent Errors or Omissions

Consistently making errors or leaving out necessary information on your tax returns can attract IRS attention. Double-check your returns for accuracy before filing.

Claiming Large Charitable Donations

Claiming substantial charitable contributions relative to your income can also trigger an audit. Ensure you have the proper documentation, such as receipts and letters from the charitable organizations, to back up your claims.

Home Office Deductions

Another common audit trigger is the home office deduction. The space must be used exclusively and regularly for business purposes to qualify. Keep detailed records and measurements of your home office space.

Business Losses

Reporting business losses, especially for consecutive years, can raise suspicions. Ensure that your business expenses are legitimate and that you can provide proof.

The Audit Process

Initial Notification

The audit process begins when you receive a notification from the IRS. This notice will be delivered by mail; the IRS does not initiate audits via phone calls or emails. The letter will detail the tax year under review and provide instructions on what to do next.

Preparing for the Audit

Once you receive the audit notice, it’s crucial to start gathering the necessary documents and information. You may want to consult a tax professional or accountant to help you prepare. They can guide you on what specific records you need and how to organize them effectively.

During the Audit

The audit can take place in several ways: by mail (correspondence audit), at an IRS office (office audit), or your home or business (field audit). During the audit, the IRS agent will review your documents and ask questions to clarify discrepancies. It’s essential to be honest, cooperative, and provide clear and accurate information.

Types of Documentation Required

Personal Income Records

  • W-2s and 1099s: These forms report your earnings and other income.
  • Bank Statements: Provide evidence of your income and expenditures.
  • Investment Statements: Include details of dividends, interest, and capital gains.

Business Records

  • Receipts and Expense Logs: Document business expenses and justify deductions.
  • Payroll Records: Show payments made to employees, including taxes withheld.
  • Invoices: Confirm income received from clients or customers.

Proof of Deductions and Credits Claimed

  • Charitable Contributions: Receipts or letters from charitable organizations.
  • Medical Expenses: Bills, receipts, and insurance statements.
  • Education Expenses: Tuition receipts, book purchases, and student loan statements.
  • Mortgage Interest and Property Taxes: Statements from lenders and tax authorities.

Do’s and Don’ts During an Audit

Do’s

  • Be Organized: Keep all your documents neatly arranged and readily accessible.
  • Be Honest: Provide truthful and accurate information to the auditor.
  • Ask Questions: If you don’t understand something, don’t hesitate to ask for clarification.
  • Stay Calm and Professional: Maintain a composed demeanor throughout the process.

Don'ts

  • Don’t Ignore the Notice: Respond promptly to the IRS notification.
  • Don’t Provide Unnecessary Information: Only supply the documents and information requested.
  • Don’t Be Argumentative: Stay respectful and cooperative during interactions with the auditor.

Outcomes and Next Steps

After the audit, the IRS will accept your return as filed, propose changes, or assess additional taxes, interest, or penalties. If you agree with the findings, you can sign an agreement form and make the necessary payments. If you disagree, you can appeal the decision or seek mediation.

Receive Personalized Audit Assistance from GCK Accounting

An IRS audit can be daunting, but you don’t have to do it alone. At GCK Accounting, we offer personalized audit assistance to help you navigate the process smoothly. Our experienced professionals will guide you through every step, ensuring you have the support and expertise to handle the audit confidently. Contact us today for more information and assistance.

Frequently Asked Questions

Is an IRS audit something to be worried about?

While an IRS audit can be stressful, it doesn’t necessarily mean you’ve done something wrong. Many audits result from random selection or simple discrepancies. With proper preparation and assistance, you can handle an audit effectively.

How does the IRS notify me of an audit?

The IRS notifies you of an audit through an official letter. They will never initiate an audit via phone calls or emails.

Are there different types of IRS audits?

Yes, there are three main types of IRS audits: correspondence audits (by mail), office audits (at an IRS office), and field audits (at your home or business).

What should I expect during an IRS audit?

During an IRS audit, you can expect to provide various financial documents and records for review. The auditor will ask questions to clarify discrepancies and ensure accurate tax returns.

How can I avoid an IRS audit in the future?

Ensure your tax returns are accurate and complete to avoid an IRS audit. Keep thorough records, report all income, and avoid taking deductions or credits you cannot substantiate. Regularly consulting with a tax professional can also help ensure compliance with tax laws.
For expert advice and assistance with your bookkeeping and accounting needs, contact GCK Accounting today! Our team is ready to help you manage your finances effectively.