Tax Audits and Working with the IRS

The Internal Revenue Service (IRS) regularly audits filed income tax returns. Receiving a notice of a tax audit can feel daunting, but today’s tax return audits are not like the horror stories of decades past. Understanding the IRS audit process can help you feel more confident about getting audited.

What Is a Tax Audit?

A tax audit is a more in-depth review of your tax return. The IRS tries to perform audits as soon as possible, so the majority of audits are performed within two years of the return’s tax year. The goal is to verify that taxpayers are following tax law and paying the correct amount of tax. Audits are supposed to correct mistakes and identify fraud.

However, there isn’t an assumption of fraud or wrongdoing just because the IRS is performing an audit. Some audits are completely random and others are done because the IRS identified red flags that signal a potential issue. Some taxpayers are more likely to be subject to an audit than others, including low-income taxpayers, self-employed, and high earners.

Vivian Hoard is a tax law attorney with Fox Rothschild in Atlanta, Georgia. She stresses the importance of taking responsive action if a taxpayer receives an IRS audit letter. “Ignoring an audit doesn’t make it go away. It just gets worse.”

Types of Tax Audits

The IRS may use four types of tax audits to perform its auditing process. The type of audit it chooses will depend on the amount of tax owed and the complexity of the issue in question. No matter which audit method is chosen, they all start with an audit letter sent in the mail. The IRS will never commence an audit by phone or email.

1. Correspondence Audit

The most common type of audit performed is a correspondence audit. About 75% of audits are this type. The IRS will send written communication through letters to which the taxpayer is expected to respond. Simple and minor issues are typically resolved through this type of audit.

When you receive the notice of audit letter, it will include a request for additional information. It could be a more detailed explanation of accounting discrepancies, bank account statements, or proof of donations made. If your documentation is greater than what can be reasonably mailed, you can request an in-person audit.

2. Office Audit

For more complex cases, the IRS may require an in-person audit in the IRS office. This type of office audit is more in-depth and will include document production and an interview. IRS employees will communicate what you need to bring with you to the audit. Taxpayers do not have to face an office audit alone. They have the right to bring a Certified Public Accountant (CPA), tax attorney, or enrolled agent to the audit with them.

3. Field Audit

The IRS may require a field audit for the most complex audit situations. These are the most in-depth audits that take place in the taxpayer’s home or place of business. This enables IRS investigators to thoroughly research the tax issue that triggered the audit. It is also the most broad type of audit because IRS agents will review documents and conduct interviews.

4. Taxpayer Compliance Measurement Program (TCMP)

During a Taxpayer Compliance Measurement Program (TCMP), IRS examiners look into every aspect of your life that could have even the slightest impact on your claimed taxable income in your tax return. This type of audit is more rare than the other three types. It can go beyond bank statements and accounting records to include documents like your marriage license, birth certificate, or name change records.

How Long Does a Tax Audit Take?

Several factors impact how long an IRS audit can take. The type of audit being performed will have the most significant impact. In addition, your responsiveness during the process can also significantly impact how long the tax audit process takes.

The complexity of the issue being audited and the availability of the information the IRS wants to see can also impact the amount of time the audit takes.

What Are Taxpayer Rights During an Audit?

Taxpayers have rights during an IRS audit. For full transparency, the IRS lists out the taxpayer rights on the IRS.gov website. Knowing your rights helps you advocate for yourself during an audit.

• Professional and courteous treatment by IRS employees.
• Privacy and confidentiality about tax matters.
• Know why the IRS is asking for information, how the IRS will use it, and what will happen if the requested information is not provided.
• Representation by oneself or an authorized representative.
• Appeal disagreements, both within the IRS and before the courts.

Right to an Extension

The IRS can be intimidating, and people can panic when they cannot meet the short deadlines listed in its communications. Thankfully, taxpayers can request an extension.

For correspondence audits, you can request an extension by fax or mail. Generally, the IRS will grant you a one-time 30-day extension. There are exceptions to this, so you may want to hire an attorney if you have any doubts about whether you qualify.

If you need an extension in an in-person audit, you must contact your IRS examiner. In some situations, you may need to contact the examiner’s manager.

What Happens After a Tax Audit?

There are three possible outcomes of an IRS audit. There could be no change to your tax return. You won’t owe any more taxes, and you won’t be owed a refund. Another possible outcome is agreed-upon IRS-proposed changes. The third possible outcome is when the IRS proposes changes, but you disagree with them. For the agreed and disagreed outcomes, the IRS may propose that the taxpayer owes additional tax fees to the IRS or that the taxpayer is owed a refund. The IRS will send you an audit report with details of the audit outcome.

You can file an appeal if you disagree with the audit’s outcome. All taxpayers have appeal rights through the Office of Appeals. When filing your appeal, include all supporting documentation that can validate your disagreement. Another option is to pursue the dispute in a U.S. tax court.

Hoard explains that several options are available to taxpayers if they disagree with the post-audit determination issued by the IRS. “There are various ways through the system to resolve the case. You can file a Tax Court petition. That’s the cheapest method because if you file a petition, you don’t have to pay the tax first. You can also go to what’s called the IRS Office of Appeals, not to be confused with an appeals court. The other option is to pay the tax and then sue for a refund in District Court. But that’s more expensive because you have to pay the tax upfront and for legal representation for the lawsuit.”

Potential for Criminal Charges

The majority of people who get audited do not have to worry about criminal charges. A simple mistake won’t trigger criminal charges on its own. The IRS will only initiate a potential criminal investigation if signs of fraud are seen.

The first phase is a preliminary investigation to determine if there is a potential for financial or tax fraud. After this first review, the IRS may initiate a “subject criminal investigation” to gather more evidence. The gathered evidence is collected into a “special agent report” that gets sent to the Department of Justice, Tax Division or the United States Attorney. It is up to these departments to decide whether or not to pursue criminal charges. The outcome of a criminal trial has significantly more consequences than additional tax liability.

Hoard explains how a taxpayer could face civil and criminal liability during an audit. “On the civil side, if they suspect fraud, they can make a referral to the Criminal Investigation Division (CID) and the audit generally stops until the CID makes a determination about whether they want to move forward with criminal charges.”

How To Resolve a Tax Audit with the IRS

Do not try to ignore or avoid an IRS notice of an audit. This will only delay the inevitable and make the situation worse. The best way to handle an IRS audit is to read every communication completely, taking note of important dates and action items.

Respond promptly to all communications that require a response. This will help keep the audit process moving. If you need clarification, request it before submitting your response.

Hiring a tax attorney who represents clients going through an audit can also help. The lawyer will have experience working with the IRS and will be familiar with the audit process. They will help you know what to expect and protect your rights. The lawyer can also communicate with the IRS on your behalf, helping reduce your stress.

Find Experienced Legal Help

If you receive a notice of an IRS audit in your mailbox, do not panic. Being the subject of an audit does not always mean you did something wrong. Read the notice completely to determine what type of audit the IRS is performing and what additional information it is requesting. Respond promptly with the information requested. Speaking with a tax attorney can help you understand the process and your rights as you navigate your IRS audit.

Visit the Super Lawyers directory to begin your search for an experienced tax attorney. For more information, read our guide on tax law.