April 9, 2014

What does it mean to get audited is the first of a three-part series about IRS Audits. Check back soon for the next article, What does the audit process look like?

Back in the day, the word “audit” conjured up widespread fear and loathing. With an astonishing 5.6 percent of all Americans receiving that dreaded notice from the Internal Revenue Service in 1963, nearly everyone knew someone who had been subjected to a tax audit. The number of audits has declined sharply since then, with a 23 percent decline in the past twenty years. Nonetheless, the IRS has not completely pulled the plug on audits, although budget cuts has precipitated a shift from all-encompassing in-person audits in favor of less cumbersome, less costly audits that focus on specific tax issues.

Reasons for an IRS Audit

The vast majority of audits are related to items on tax returns that trigger red flags, such as math errors, inconsistencies between W-2 and 1099 forms and reported income or income far out of line with earnings from previous years. You may also be audited if your tax return reflects transactions with another taxpayer who is being audited. Automatic red flags such as above average withholding for your income level may also trigger an audit. A certain number of audits are the result of plain bad luck – returns chosen at random.

The letter informing you that you are being audited should include a notice number in the right hand corner. This notice number will indicate the reason for the audit. You should use this notice as a guide to determine which records you should gather.

The Types of Audits

The letter you receive should also indicate what type of IRS audit you have been selected for. Depending on the type of audit you are facing, your tax matters could be settled in a matter of days or linger for months. For more involved audits, obtaining the services of a tax professional is highly advisable.

Correspondence Audit

A correspondence audit is conducted by mail. Correspondence audits usually involve tax matters that are relatively easy to resolve. In most instances the IRS is seeking copies of checks, receipts and other documentation to support deductions or credits that you have claimed, or to clarify other items on your tax return.

Office Audit

An office audit is conducted in person at your local IRS office. You should be prepared to report to the office with copies of the requested documentation. You may also have a legal representative or your tax preparer present during the audit.

Field Audit

Like an office audit, a field audit is also conducted in person. Unlike an office audit, a field audit is conducted in your place of business. You should be prepared to present copies of your documentation at the audit, and your legal representative or tax professional should also be present. You are not obliged to allow IRS personnel into your home unless the agency has obtained a court order. If you claim the home office deduction, agents may request to enter your home; if you refuse the request, your deduction will almost certainly be disallowed.

Taxpayer Compliance Measurement Program Audit

The IRS uses Taxpayer Compliance Measurement Program (TCMP) audits to update the data it uses to write it computer scoring program. This is the most extensive type of audit, which examines every aspect of your tax return.If you receive notice of a TCMP audit, you should be prepared to present exhaustive documentation, including birth and marriage certificates.

What an Audit Is Not

While an audit may require significant effort on your part to gather the documentation required, it should not inspire panic. The unofficial threshold set by the IRS for tax fraud is at least $70,000 in unlawfully uncollected taxes and at least three years of fraudulent conduct. Therefore, while the odds are stacked against you in terms of escaping without additional tax obligations, it is extremely unlikely that as an honest taxpayer, you will face criminal charges or jail time as a result of an audit.