Find answers to the most frequently asked questions about IRS audits from a tax attorney with over 25 experience successfully representing clients before the IRS.
The IRS randomly selects 2%-4% of the general population in the low to middle income classes.
The IRS also audits 5%-10% of mid-high income earners, above $60,000 /yr.
In addition, when tax returns are filed, they are evaluated for their conformity with certain norms that the IRS expects to see in similar tax returns. The IRS has developed a set of norms based on audits of samples of randomly selected returns from prior audits. If your tax return does not seem to match up with the tax returns of similar taxpayers, your return might be at higher risk for an audit. Once a tax return is flagged for this reason, it will be reviewed by an experienced auditor. At this level, the auditor can either accept the return as it was filed, or flag certain items for additional review. If the auditor flags certain items for review, the tax return will move on to the examining group which assigns the case to a specific auditor. The auditor reviews the tax return an additional time and decides whether or not to conduct and audit.
Another special audit would be all individuals with foreign bank accounts or foreign assets.
7% of small and midsize corporations get audited, along with all corporations whose gross income exceeds $100 Million.
5% of partnerships get audited.
20% of estates get audited.
1% of trusts get audited.
If you don't have representation, the IRS will see that, and human nature is that they will "walk all over you." You'd do the same if you are in their shoes. It is important that you get competent tax and legal advice, as this area of law encompasses both fields.
I would not have your own tax preparer represent you in an audit as there is a clear conflict of interest between the result that would be in their best interest, and the result that would be in your best interest. Occasionally you need to show there was a lack of communication between you and your tax preparer, getting you out of significant penalties. Often less skilled representatives will want to blame the understatement of income on the taxpayer so that the IRS doesn't believe that the tax preparer did anything wrong. This only cost you money.
The only case where I would not have a tax attorney represent you is when the amounts are so small as it is not cost effective, or that you are certain that all income has been reported and your business expenses are legitimate.
For more information about your situation and whether or not you need legal representation visit our contact us page.
No. The IRS never contacts taxpayers through email in order to initiate an audit. Due to certain disclosure requirements, the IRS will contact the taxpayer to notify regarding selection for an audit solely through mail or telephone. The letter you receive from the IRS will indicate the type of audit the IRS intends to perform, as well as any instructions for you to follow.
For more information, read this article about how you will know if the IRS is auditing you.
If you ignore the audit notice, the IRS will overestimate the amount you owe, send the Notice of Deficiency to the last address they have on file for you, and assess the tax, penalties and interest without you even knowing it. Then they can collect your assets without your approval. Although this appears to violate the Due Process Clause, the courts have continuously upheld this technique.
No, filing an amended return does not affect the selection process of the original return. However, amended returns also go through a screening process just as initial returns do, and the amended return may be selected for audit. In general, if you explain the reason for the amended return and back up your return with any required documentation, the IRS will simply process your amended return without initiating an audit.
The location of the audit depends on the type of audit being conducted. A correspondence audit is conducted entirely via mail, so there is little to no in-person interaction with the IRS auditors. In an office audit, the taxpayer whose tax return is being audited must report to the local IRS audit for an in-person meeting with the auditor. A field audit involves in-person interview and examination of records at the taxpayer’s home or place of business. For more information, read these articles about Office Audits, Correspondence Audits and Field Audits
If your tax return has been selected for a field audit, then it will generally take place at your home or place of business because that is where the books and records are kept. If you prefer to conduct the audit at an IRS audit, you can submit a request but it may not be granted.
If your tax return has been selected for an office audit, but you wish to change the in-person audit to another IRS office, you can submit a request. In granting this request, the IRS will consider several factors, such as your current location, the location of the business, and the location of the books and records. If you have been selected for a correspondence audit, but you believe the books and records are too voluminous to mail, you can request a face-to-face audit.
The audit process begins with an IRS audit letter and generally includes the specific items of income and expense that the IRS is initially intending to review. These items may be expanded to other years and other items if the initial categories don't reconcile. It's imperative to have all your documents well-organized, and a thorough understanding of the tax and legal issues in the case - at the initial audit interview. The IRS starts with an interview to try to lock you into admitting things that will harm you at a later time. For example, they will ask you about your beginning and ending cash balances, to try to prevent you from arguing that you had a cash hoard from inception. Proper and thorough preparation for the audit is the key to winning an IRS audit. For more information, read this article about what to expect from IRS audits.
The IRS will ask you to produce all business, personal, brokerage and investment bank statements, all credit card statements, canceled checks, invoices and receipts for your business and itemize deductions. They will ask for all real property escrow documents and related entity transaction documents. Each document should be carefully scrutinized to submit only those documents that have no privileges attached to them. This includes the attorney-client privilege, attorney work product privilege, marital privilege, psychoanalysts privilege, etc. It's imperative to not submit any documents unless it has been determined that they are discoverable under the Federal Rules of Evidence. If you no longer have the documents, the IRS may Summons the records from third parties including banks, financial institutions and others such as your clients, customers and business partners. For more information, read this article about IRS requests for information.
As a general rule, records related to an asset should be kept as long as you intend to keep the asset, plus an additional three years. This means that if you dispose of a piece of property in a taxable disposition, you should keep the records related to the asset until the statute of limitations expires. The records related to the property should also be used to calculate depreciation, amortization, or depletion deduction, or calculate gain and loss. If you exchange the asset for another asset, the tax basis in the new asset may be calculated according to the original asset. For this reason, you must keep the records related to the original asset until three years after you dispose of the new asset.
Payroll records should be kept for six years. As with any other records, you should generally keep the records that support an item of income or deductions on a tax return until the statute of limitations has run on that tax return. In the case of payroll records, you should check whether any of the records pertain to current employees, and if so, those records should be maintained with current records.
For more information, read this page about Payroll Taxes.
The IRS can audit individual, corporate and partnership tax returns for three years from the due date or actual filing date. This three-year statute of limitations can be expanded to six years if you understate income by 25%, or have a $5000 understatement of tax as a result of a foreign bank account. These statute of limitations can be extended by mutual agreement, or by the IRS issuing a Notice of Deficiency within the statute of limitations. For more information, read this article about the statute of limitations for an IRS audit.
According to the IRS, the results of an audit may be checked by the completing auditor’s manager or supervisor. However, this may not always occur. If the manager does check the work of the auditor and any errors are noted, you will be contacted about the error found and any proposed correction to the tax return. If this happens, the manager will explain to you the impact that the proposed correction will have on your tax return as well as the amount of tax you owe. For more information, read this article about what happens at the conclusion of an IRS audit
In the case of office and field audits, you will have a specific date and time for an in-person appointment with the IRS representative handling your audit. If the time comes for your audit appointment but you are not ready, then you have several options. You can contact the auditor and request more time to compile the requested documents and records. Sometimes, your auditor will ask you to still appear at the original appointment date but only present whatever records you have been able to assemble at that time. However, if may still be able to postpone the appointment to a late date but doing so may require approval from the auditor’s manager.
If you don't agree with the audit results, you have the right to appeal the IRS final determination, within 30 days of the IRS letter. The appeal must include sufficient supporting documentation, evidence, facts and legal analysis as to why you are entitled to a better result. If an audit is timely appealed , an IRS Appeals Officer is assigned to the case and negotiations at the appeals level begin.
An IRS Appeals Officer is more experienced, more educated, and more knowledgeable about the law and the facts, then a Revenue Agent. An appeal must be handled in a technically competent manner with sufficient evidence and legal authority in order to prevail.
For more information, read this article about appealing an IRS audit.
Because of the fact that some of the people that are audited by the IRS each year are simply randomly chosen, it is impossible for you to avoid being selected within those groups. It is a numbers game and there is a chance you could be randomly chosen.
However, a significant portion of those selected for Audits are based on conformity to established norms and therefore you can reduce the likelihood that you will be selected within that group. The best way to avoid being audited is to prepare your tax returns correctly, from inception, and have nothing out of the ordinary in your tax returns, that you cannot prove. Assure you have all supporting documentation and evidence in your file to present the best defense available.
While you cannot do anything to avoid Audits with absolute certainty, you absolutely can Audit-proof your finances by keeping perfect records on all financial transactions and keep those records organized and accessible. With the plethora of accounting programs available today, and many of them also offering mobile apps, the task of solid bookkeeping is now easier than ever. An added benefit to perfect bookkeeping, is that if you do get audited and the IRS Auditor sees that your records are bullet proof, they are much less likely to question any of your record keeping or reporting practices that are outside the scope of the original audit, greatly simplifying the audit process.
For more information, read this article about IRS audit red flags.