What is an audit?
An audit is an examination of a taxpayer’s financial books and records to ensure that the information the taxpayer provided on their tax return is accurate and that the amount of tax reported on their tax return is correct.
How are taxpayers selected for an audit?
The IRS uses different methods for choosing who is audited: Random selection and computer screening. One way the IRS chooses returns to be audited is to use random selection. Another method the IRS uses involves using a computer to compare returns to statistical “norms” to find outlier returns.
Related examinations.
Sometimes the IRS audits taxpayers when their returns involve issues or transactions with other taxpayers, such as business partners or investors, whose returns were selected for audit.
What won’t trigger an audit?
According to the IRS, filing an amended return won’t trigger an audit of the original return. However, an amended return goes through the same screening process as the original return so the amended return independently may be selected for audit. The IRS also says that a return claiming a refund isn’t automatically put in the audit pile.
The audit notice.
There are two types of audits: correspondence audits (or mail audits) and in-person audits. An in-person audit can take place in an IRS office or at the taxpayer’s home, place of business, or representative’s office (the IRS refers to these out-of-office audits as filed audits).
For each type of audit, the IRS will initially notify the taxpayer of the audit by mail. The audit notice will also provide contact information and instructions for the taxpayer, including a list of records the IRS wants to review and a response date. Here’s a listing of records the IRS may request.
Note.The IRS accepts some electronic records in lieu of or in addition to paper records. If in doubt, the taxpayer should use the contact information on the notice letter to reach out to the IRS to confirm what types of records the IRS will accept.
How does the IRS notify taxpayers about an audit?
The taxpayer will be notified by mail when the IRS picks a taxpayer’s return for audit. The IRS does not notify taxpayers of an audit by telephone. With the mailed notice, the IRS provides the following information:
Mail audit:
Fax a written request for more time to respond to the number shown on the IRS’ audit letter. If unable to submit the request by fax, mail the request to the address shown on the IRS audit notice. Generally, the IRS can only grant a one-time, automatic 30-day extension and will contact the taxpayer if an extension can’t be granted.
In-person audit:
For an extension of time to respond for an in-person audit, the taxpayer should contact the IRS at the number listed on the notice to request an extension. If the taxpayer can’t reach that person, they should ask to speak to the person’s manager.
Note. The IRS accepts some electronic records in lieu of or in addition to paper records. If in doubt, the taxpayer should use the contact information on the notice letter to reach out to the IRS to confirm what types of records the IRS will accept.
Note. It is very important to respond to the IRS’ audit by the response date on the audit notice. The IRS will still conduct the audit without the taxpayer’s participation.
Any records mailed to the IRS should be sent using a method that includes delivery confirmation. A cover letter included with the documents should list the documents in the package and a request for the auditor to confirm receipt of the documents.
Note. If a taxpayer is selected for a mail audit but has too many books and records to mail, they can ask for an in-person audit.
Conducting the audit.
Generally, the audit notice will identify the returns the IRS wants to audit. However, if the IRS discovers mistakes in the return(s) listed in the notice, it may expand the audit to include other years. Generally, the IRS can audit returns filed within the last three years. If the IRS finds “substantial errors” they may go back as far as six years.
The IRS’ examiners may use one of these Audit Techniques Guides to assist them in conducting the taxpayer’s audit.
If an audit takes a while to be resolved, the IRS may ask the taxpayer to extend the statute of limitations. The statute of limitations is generally three years after the return is due or was filed (whichever is later). The statute of limitations for claiming refunds is different.
Note. The statute of limitations restricts when the IRS can review, analyze, and resolve tax-related issues. When the statutory period expires, the IRS can no longer assess or collect additional tax, or allow a refund. For more information, see Statute Expiration Dates.
For more information about extending a statute of limitations, see Publication 1035, Extending the Tax Assessment Period.
Note. A taxpayer doesn’t have to agree to extend the statute of limitations. However, if the taxpayer doesn’t agree to extend the limitations period, the IRS will decide the audit based on the information they have available.
How long does an audit take?
The length of an audit varies depending on the type of audit; the complexity of the issues; the availability of information requested; the availability of both parties for scheduling meetings; and whether the taxpayer agrees or disagrees with the findings.
Concluding the audit?
The IRS will conclude an audit in one of three ways:
No change: an audit in which the taxpayer has substantiated all the items being reviewed and results in no changes to the taxpayer’s return.
Agreed: an audit where the IRS proposed changes and the taxpayer understands and agrees with the changes. If the taxpayer agrees with the auditor’s result, then they will be asked to sign the examination report or a similar form.
Disagreed: an audit where the IRS has proposed changes, and the taxpayer understands but disagrees with the changes. If the taxpayer disagrees with the auditor’s result, then the taxpayer can request a conference with the auditor’s manager. The IRS also offers mediation – alternative dispute resolution (ADR) or the taxpayer can file an appeal if there is enough time remaining on the statute of limitations.
After the audit.
If the taxpayer owes taxes after an audit, there are several payment options available. Publication 594, The IRS Collection Process, explains the IRS collection process in detail.
By Thomson Reuters/Tax & Accounting. All Rights Reserved.
