October 16, 2014

IRS audits are actually becoming less common these days, with the number of actual audits performed in 2012 dropping 5.3% compared to the year before. That trend is expected to continue due to budget cuts and new responsibilities that have been placed on the department, ultimately resulting in fewer IRS agents available to conduct examinations.

The number of IRS agents available to perform tax audits in 2014 is expected to be at its lowest number in over 3 decades.

Last year the Internal Revenue Service selected approximately 1,481,966 individual tax returns to audit, or roughly 1% of tax payers. While the mere mention of the words “tax audit” strikes fear in the lives of many, there is really nothing to worry about if you are chosen as one of the lucky few. Nothing to worry about as long as you are prepared and haven’t committed tax fraud, that is.

Find out why you were chosen to be audited

If you have been selected for an audit, that doesn’t necessarily mean that you have made an error on your tax return. Individual tax payers returns are selected using several different methods, including:

  • Random: Some returns are selected at random by a computer screening process, which can often involve a statistical formula that identifies returns that are out of the “normal” or “average” range.
  • Document Mismatch: Oftentimes the simplest slip of a finger while entering information on your return, could result in inaccurate information being submitted. This could include W-2 forms or 1099’s that are reported but don’t match the information provided.
  • Related/Partner Returns: Sometimes a return may be selected for audit when it includes transactions or other related issues with other taxpayers. This is usually found due to a business partners or investors return already being audited.

What type of audit are you facing?

There are actually 3 main types of audits that the IRS performs regularly. Depending on which type they have scheduled for you, it may end up being a fairly painless procedure for you. The IRS will always start the audit process by sending you a letter. This letter should tell you what kind of audit you are being scheduled for.

Correspondence audit (Form 566(CG)) This is by far the simplest form of an IRS audit. Usually a taxpayer will receive this type of an audit when they forgot something simple on their tax return (like a signature) or if more explanation is required of something more specific (like itemized deductions).

In-office audit(Form 3572) These types of audits are most commonly sent to people who are self-employed or who own small businesses. The taxpayer will be required to go to the local IRS office to explain certain things on their tax return. These types of audits can generally take several hours, but are usually resolved on the day of the visit.

Field audit (Form 4564) These are the audits where IRS Field Representatives will be sent to your home or your place of business to conduct the examination. That is usually because of the fact that there is too much information to send via mail or carry with you into the nearest office. These are by far the most comprehensive types of all the audits and can take multiple visits to resolve all of the issues involved.

Know Your Legal Requirements

There are many laws you should know with regard to the retention of your personal and business financial records. For example, all business records regarding any particular asset should be kept for as long as the asset is kept, plus three years. Payroll records need to be kept for all personnel for at least six past years plus the current year.

The IRS can include returns filed within the last three years when they perform an audit. They can also include additional years if a substantial error is found, but will generally not go back further than six years.

Gather the Necessary Documentation

Once you have identified the type of audit that is being performed, you can start preparing your supporting documents. The IRS will include in its letter to you any specific documentation that they will need to review during the examination.

The key to having all the documentation you need for an easy audit is to get in the habit of retaining all your documents in a clean and organized manner ahead of time. Every year when you file your return, you should maintain a file that includes any and all supporting documentation to go along with it.

Keep all of this information along with a copy of your W-2’s or 1099’s and a copy of the return you submitted with the IRS.

If you have not kept the tidiest of records for the year that is being examined, go through your return very carefully and try to recollect the information that got you to those figures originally. Once you have identified where the figures came from, you can try to find them again. For example, if you claimed a lot of medical expenses, you may have some luck by contacting the billing department of the hospital or Doctor’s office that treated you and requesting copies of your bills for that year.

Having to recreate records this way will certainly take you longer to collect, so make sure you start gathering all of your required documents as early as possible.

Organization = A Quick Audit

Keeping your records in a clean and simple manner is critical to a problem-free audit. If you have all of your supporting documentation in a well organized, professional manner when the IRS Field Agent comes knocking on your door, they will be able to get all the information they need to wrap up the examination quickly.

What if you’re not prepared?

If the date of your scheduled appointment with the IRS is soon approaching and you do not feel completely prepared, you can always try requesting more time. You should contact your auditor directly at the number that was provided in your notification letter to explain that you would like to postpone your appointment.

While the IRS agent is more than likely to want to work with you, it is important to remember that the sooner the audit begins, the sooner it can be over. It may be more beneficial to keep your original appointment and at least get the process going. You can then schedule a follow up appointment at a later date and time to submit any additional documentation that you were able to gather.

Obtain professional representation if needed

In any case, if you feel that you are in over your head or intimidated by the auditing process, it may be a wise idea to consult with a licensed tax professional. They can review your case information and all of the documentation that you are able to provide and better advise you on how to proceed in dealing with the IRS.

The most important thing is to remain calm and collected. The more organized you are, the better. And don’t forget to behave in your highest professional regard when dealing with the IRS agent directly. Your attitude and willingness to cooperate with their procedures will make the examination quicker and less painful for all involved.

Additional Tax Tips:

What Happens in an IRS Audit
What to do during an IRS Audit
How to survive an IRS tax audit