While taxpayers dread the thought of their tax returns being audited by the IRS, in reality it occurs with a very small percentage of taxpayers every year. In 2011, 1.58 million people were audited, which was a little more than 1 percent of individual returns. If you are one of the unlucky few who do receive a 'review' notice from the IRS, here is some important information to consider.
First, know that if your return is selected for further examination, it does not automatically mean that your return reflected erroneous information. In fact, there are several reasons why tax returns are chosen, including computerized screening, random sampling and an income document matching program. Keep in mind that many examinations result in a refund or acceptance of the return without any required changes.
Next, do not panic and pay without doing your research. Many IRS notices can be dealt with simply and painlessly.
There are three types of audits: correspondence audit, field audit and office audit. A correspondence audit is when the IRS sends a letter notifying the taxpayer of a potential error or change to the tax return, or requests additional information or documentation which can be submitted by mail and does not require an in-person meeting with an IRS agent. A field audit occurs when the IRS needs a more detailed review of your books and/or records, and usually takes place in your home or business. Finally, an office audit requires you to make a visit to an IRS office to provide requested documentation.
Once you have identified the purpose of your notice, you should contact the IRS at the contact number provided on the letter. You may also want to meet with your local tax preparer for additional guidance.
If you receive an office audit and are asked to appear before the IRS, some items you should bring are:
• Copies of all affected tax returns;
• Copies of all relevant receipts and supporting documentation for the tax years in question;
• Name and contact information for a tax accountant or lawyer; and,
• Anything else requested in your IRS letter.
The most important thing to keep in mind when receiving a notice is to be sure to respond to the IRS in a prompt and courteous manner. Failing to do so may lead to even greater penalties. If you find yourself needing additional assistance, consult with a qualified and experienced tax professional who can help.