There are three types of IRS tax audits – a Correspondence (Mail) Audit, Office Examination Audit, and a Field Audit. A Correspondence Audit addresses incorrect math or missing documentation and is typically resolved by mail. An Examination Audit usually takes place at a local IRS branch office and is used to confirm that all income was reported and deductions are legitimate. A Field Audit typically involves an IRS auditor onsite at the individual’s/organizations home or office, or their representative’s office to review records to confirm that all reported information is accurate.
IRS Tax Audit Notification
The IRS will notify an individual or business by mail or telephone if they are selected for an audit. Note that being selected for an audit doesn’t necessarily mean that there is an issue with your tax return submission. The IRS tax audit selection process is based on (1) random selection and computer screening in which a tax return is compared against similar returns and there are inconsistent findings, or (2) if a return involves issues or transactions with other taxpayers that have been selected for an audit. If a return is selected for audit, and experienced auditor will review the return to identify issues and submit the return to a larger examining group for further review.
Tax Audit Documentation
The IRS tax audit notification will include a request for specific documents that will support claims made in the submitted tax return. Supporting documents commonly requested include:
-Pay stubs or other employment documents
-Home mortgage statements or other loan agreements
-Medical and dental records
-Theft or loss documents
-Brokerage statements and retirement account records
-Schedule K-1 documents
-Previous tax returns
The IRS may also request submission of questionnaires pertaining to car and truck expenses; travel, meals, and entertainment expenses; and repairs and maintenance expenses.
Tax Audit Preparation and Outcomes
The tax audit may result with no action to be taken, changes that are agreed upon by both parties, or changes that the taxpayer doesn’t agree with and appeals. If additional tax is owed, the IRS can charge interest at a rate of 5% per year from the date of the original return, and this interest charge is compounded daily.
To be prepared in case of a tax audit, it is recommended to:
-Keep tax returns and supporting documents for at least three years
-Save checkbook registers and bank statements
-Save receipts for submitted expenses and deductions