IRS AUDIT: Definition, Types, and How an Attorney Can Help You

irs audit
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The phrase “audit” can make anyone sweat, but knowing what it is and how the Internal Revenue Service (IRS) works may help you feel more at ease. Some audits are minor inconveniences, while others are burdensome. You’ll know—or at least have a better notion of—what’s involved once you determine the type of tax audit that’s being undertaken. Here’s all you need to know about IRS audit and how an attorney can help you when you get a letter.

What is an IRS audit?

An IRS audit is a thorough study or review of your information and accounts to ensure you’re reporting things correctly, obeying tax regulations, and submitting the correct tax amount. In other words, the IRS is merely double-checking your figures to ensure there are no errors in your return.

State tax agencies may also conduct audits. You don’t need to be concerned if you’re telling the complete truth. Nothing about an IRS or state audit is inherently malicious. People who deliberately scam the system, on the other hand, have the right to be concerned.

What Causes You To Get Audited By The IRS?

Here are major red flags that will almost certainly place you in the IRS audit hot seat.

#1. Making math mistakes

When the IRS begins an investigation, “oops” will not suffice. Make no mistakes. This applies to everyone who is required to file taxes. Don’t make the mistake of writing a 3 instead of an 8. Don’t get distracted and overlook the final zero. Mistakes happen, but if you handle your own taxes, make sure you double- and triple-check your numbers. You will be fined whether or not your mistake was intentional. If your math is a little wobbly, employing competent tax preparation software or a tax preparer near you will help you avoid costly mistakes that could result in an IRS audit.

#2. Failure to record some earnings

Is there an easy method to pass an IRS audit? Don’t report a portion of your earnings.

Assume you’re employed herding sheep for Farmer Joe and you supplement your income by producing articles for a sheep-shearing newspaper on a freelance basis. You could be tempted to submit simply the W-2 form from your herding job and conceal the freelance writing revenue on your Form 1099.

A 1099-MISC reflects nonwage income such as freelancing, stock dividends, and interest. The 1099-NEC is a sort of 1099 that commonly records amounts paid to independent contractors.

So, guess what? Because the IRS already has a copy of the income mentioned on your 1099, it’s just a matter of time before it discovers your omission.

#3. Making an excessive number of charity donations

If you made considerable charitable gifts, you may be entitled for some well-deserved tax breaks. This piece of advice is self-evident: do not record fake donations. Don’t claim your contribution if you don’t have the necessary evidence to back it up. It’s really that simple. Claiming $10,000 in charitable deductions on a $40,000 salary will almost certainly raise some eyebrows.

#4. Too many losses reported on a Schedule C

This one is for self-employed people. If you are your own employer, you may be tempted to conceal your earnings by claiming personal expenses as business expenses. But, before you write off your new ski boots, remember the suspicion that a large number of reported losses can arouse. The IRS may begin to wonder how your company is surviving. Details can be found in IRS Publication 535.

#5. Too many company expenses are being deducted.

Reporting too many expenses is similar to reporting too many losses. Purchases must be 1) ordinary and 2) required for your business in order to qualify for a deduction. Paint and paintbrushes are likely to be claimed by a professional artist because they fit both conditions. A lawyer who paints for pleasure and does not benefit from his work may have a problem. The following questions should be asked: Was the purchase common and accepted in the trade or business? Was it beneficial and relevant to the trade or business?

#6. Making a claim for a home office deduction

Home office deductions are frequently abused. It may be tempting to claim unjustified deductions for costs that do not strictly qualify. The IRS limits the home office deduction to persons who use a portion of their house “exclusively and regularly for your trade or business.” This means that a home office can qualify if you only use it for work. Answering emails on your laptop in front of the TV on occasion is unlikely to qualify your living room as a deductible office space. If you have set aside a piece of your house solely for business reasons, you may be able to claim a home office deduction. When reporting spending and measures, be truthful.

#7. Making use of attractive, tidy, round numbers

The figures on your 1040 form and other tax paperwork are unlikely to be in clear, crisp $100 intervals. Be exact in your calculations and avoid making assumptions. Not to the nearest hundred, but to the nearest dollar. Assume you’re a photographer who wants to deduct a $495.25 lens as a business expense; round up to $495, not $500. Even $500 is doubtful, and the IRS may request a proof.

Types Of IRS Audit

#1. Corespondence Audit

Correspondence audits, the first of four types of tax audits, are the most typical sort of IRS audit. In fact, they account for over 75% of all IRS audits. Correspondence audits are the most basic type of audit, and they entail the IRS sending a letter in the mail (usually a 566 letter) requesting additional information regarding a specific section of a tax return. For example, the IRS may have doubts about auto expenses and need you to send in invoices to prove your deduction.

Notice CP2000 is another type of correspondence that you could receive instead of a 566 letter. If the information you supplied on your tax returns differs from what the IRS has on file for your account, you will receive a CP2000 letter informing you that the IRS is proposing an adjustment for under or overpayment of tax obligations. You must respond with whether you agree or disagree with the message. If you disagree, you must submit supporting documentation and return the paperwork within 30 days of receiving it. If you agree and owe money, you must make immediate payment to the IRS or establish a payment plan.

Also, if you receive a letter seeking information, you should never disregard it, since doing so will only worsen what might otherwise be an easy correspondence. If you prepared your tax return correctly and have the necessary source paperwork (receipts, invoices, payments, etc.) to back up the items on your return, a taxpayer can normally handle correspondence audits on their own and will most likely not have to meet with an IRS agent in person. Simply delivering the appropriate papers should put an end to the situation.

#2. Office Audit

An Office Audit is the second type of audit. If the IRS has questions about your return that are too complex or extensive for a correspondence audit but too small for a field audit, you will receive a letter asking you to come into an IRS office for the audit. In general, an office audit is more extensive and may uncover more flaws. Typically, office audits focus on itemized deductions (Schedule A), business profits/losses (Schedule C), or rental income/expenses (Schedule E). An audit is frequently triggered by a single mistake with a schedule, but audits can swiftly extend if the auditor suspects errors in other sections of the return.

The office interview will include questions on the subject under consideration. There may also be more general questions about employment, financial situation, and lifestyle in an attempt to identify other areas of concern (such as the likelihood of underreported income). Individuals should carefully evaluate the answers and data they send to the IRS. A taxpayer can easily mistakenly offer the auditor a justification to broaden the scope of the audit.

Auditors are highly trained tax specialists who are skilled in persuading anxious taxpayers to divulge negative information. Before an office audit, you should acquire legal counsel from a tax professional. An IRS office audit usually takes only one day to complete. If the Agent needs additional information, they will give you time to provide it.

#3. Field Audit

A field audit is the most thorough of the four types of tax audits and the most complete IRS audit. It entails the IRS paying a visit to the taxpayer’s home or place of business to inspect records. IRS revenue agents conduct field audits, and they are generally more skilled and knowledgeable than most other IRS representatives. IRS revenue agents frequently specialize in a specific business.

When the IRS comes to your home or business, they may ask to view things that aren’t in your records. They do not want to be limited to a single object. A typical business audit consists of a study of financial documents, interviews with personnel, and a visit of the company’s facilities. Interviews will be conducted to gain an understanding of the management structure, accounting practices, and internal controls. Individual audits will only include a review of financial records and an interview with the taxpayer. Depending on the intricacy of the account, the audit could span anywhere from one day to a week.

Field audits are the most invasive and serious type of audit. If you’ve been chosen for a field audit, you should hire a tax attorney who will be present during the audit. Anything you say could be used against you in order to broaden the scope of an audit. To guarantee that the scope is not mistakenly increased, a tax attorney can interact with the auditor on your behalf.

#4. Taxpayer Compliance Measurement Program (TCMP) Audit

A Taxpayer Compliance Measurement Program (TCMP) Audit is the fourth form of audit. The primary goal of this type of audit is to update the IRS’ DIF scores. DIF scores are calculated by reviewing a large sample (up to 50,000 randomly selected returns) of intensive audits that are performed every few years. The IRS will review every item on the tax return during a TCMP audit, and every aspect of the return must be verified by proof. A conventional audit takes time because a taxpayer must locate checks, invoices, contracts, bank statements, and other documents for the items chosen for audit. Every line of the tax return is inspected in a TCMP audit, so you must submit documentation for all deductions, not just a few.

Whatever audit you are faced with, it is always best to get organized and remain calm. For example, gather all of your canceled checks, receipts, and other material connected to the goods to be audited and arrange them in chronological order.

How Does an IRS Audit Letter Appear?

Every year, the Internal Revenue Service (IRS) audits approximately one million people in the United States. Because auditors chose filings at random, keeping precise records will not prevent them from selecting your tax filings for investigation. Receiving the letter and realizing you will be audited is often an unpleasant experience for filers. Even the most conscientious bookkeepers can become overwhelmed. While they choose many people at random, others may receive the notice due to flaws or anomalies.

It’s to your best advantage to open an audit notification from the IRS as soon as possible and take action. An IRS audit letter is typically issued by the Internal Revenue Service, but it may also be issued by the Department of Treasury. Finally, the notice will include the name of the IRS agent who signed off on the examination.

How to Respond to an IRS Audit Letter Correctly

It is critical to contact the IRS as soon as possible and react within 30 days with either a phone call or an audit response letter. If you wait any longer, you may be punished.

Hiring an IRS Audit Attorney

Instead of facing an audit on your own, it’s generally a prudent decision to hire an IRS audit attorney.

If you’ve been assigned a field audit and are uneasy having an IRS agent come to your home or place of business, you could request an office audit. However, this may trigger red flags and indicate that you are concealing something. Your attorney can advise you on the advantages and disadvantages of a field audit versus an office audit.

The Advantages of Hiring an Attorney for an IRS Audit

There are numerous reasons why you might seek legal counsel on your side during an audit. Here are some of them.

#1. Avoid Making Mistakes

It’s normal to want to get an audit over with as soon as possible. While it is critical to cooperate with the IRS and present them with information on time, it is equally critical that you provide them with accurate information. As part of the audit process, you may be required to file new or revised returns.

Errors are simple to commit, especially while under duress. An IRS audit attorney can file your returns and provide any other documentation requested.

#2. Make use of an attorney’s knowledge of tax law.

Maintaining compliance with the IRS tax rules is a full-time job. The tax code is nearly 1,700 pages long, and even if you had all the time in the world, it’s unlikely that you’d study it cover to cover and comprehend all the complexities.

An IRS audit attorney will be prepared to go toe-to-toe with the auditor, rather than coming into an audit hoping for the best and expecting the worst. Attorneys in this sector make it a point to stay current on the current tax code, and they’ll know how to apply it most advantageously to your tax position.

#3. Obtain Protection from Untrustworthy IRS Agents

Every professional meeting contains the possibility of encountering someone who is dishonest or behaves inappropriately. When it comes to a tax audit, you may encounter an auditor who attempts to intimidate, threaten, or lie to you.

These activities violate your rights, but without the assistance of an attorney, it can be difficult to notice inappropriate activity and take action to defend yourself.

#4. Increase Your Chances of a Successful Outcome

You could have an IRS amount that includes past taxes, fines, and interest. You may even face criminal charges. Having an advocate who is looking out for your best interests in this situation can make a significant difference in the outcome of an audit.

Legal guidance could help you set up fair installment agreements in addition to potentially lowering your tax burden through negotiation. In some situations, your attorney may be able to have your debt designated as CNC, which stands for “Currently Not Collectible.”

Keep in mind that CNC status does not imply that your debt has been forgiven; nevertheless, you may be granted a grace period before you must begin repaying your obligation. 

Is an IRS Audit Serious?

If inaccuracies are discovered in your tax returns, the IRS will levy tax penalties. In significant situations of tax evasion and fraud, there is also the prospect of prison term. Although the IRS generally only flags one return for audit, it does have the right to audit returns from previous years.

How Long Does An IRS Audit Take?

The IRS audit process should take no more than five to six months. Sometimes, with good planning, they can be resolved more quickly.

Who is Usually Audited by the IRS?

According to federal data, the IRS has audited people with incomes between $25,000 and $500,000 at higher-than-average rates in recent years.

What Does an IRS Audit Cost?

If you are charged a flat fee, your total tax audit representation cost could range between $2,500 and $10,000 per tax year under review. It may rise considerably higher if your lawsuit is heard in the United States. The Tax Court.

Can I Go To Jail For An IRS Audit?

If you intentionally fail to submit a tax return, pay your taxes, or keep adequate tax records and criminal charges are filed against you, you could face up to a year in prison. Additionally, you may be fined $25,000 by the IRS for each year you fail to file.

Where Does IRS Audit Letter Come From?

An IRS audit letter is typically issued by the Internal Revenue Service, but it may also be issued by the Department of Treasury.

In Conclusion,

IRS audit statistics released in May 2022 suggest that your odds of getting audited are tiny (less than half of one percent, or 0.45%, of individual returns were audited in 2019, the most recent data available, down from 0.59% in 2018 and far lower than the 1.11% in 2010).

Overall, audits are decreasing, and due to IRS budget and staff constraints, the odds of being audited are projected to decrease more in the near future. Still, if you find yourself subject to an audit, understand how they function and your rights in the process, which are detailed in IRS Publication 556.

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