What Happens If You’re Selected for an IRS Audit?

What Happens If You’re Selected for an IRS Audit?

• Aug 15, 2021

Taxes certainly aren’t a pleasant thing to deal with, but for most people, once those taxes are filed, you don’t give them much additional thought—unless, of course, you’re selected for an audit. Receiving notice that the IRS will be auditing your taxes can cause a lot of anxiety for many people, but it may not be as bad as you think. If you know what to expect, have your documents in order, and have IRS audit assistance from a CPA, it can all go much more smoothly than you would imagine. Here’s how a typical IRS audit goes.

Why Were You Selected?

When you receive that audit notice in the mail, you’ll likely ask yourself, “Why me? Why am I being audited?” There are many reasons that people are chosen for an audit. With the current tax enforcement push from the IRS, simply following into one of the following categories can result in an audit from an IRS agent:

• Owning a business
• Being a shareholder in a limited partnership
• Earning more than $100,000 in a year

The push to audit high-income earners and businesses more severely comes in the wake of President Biden’s recent infrastructure plan, which included $40 billion for increased tax enforcement focused on individuals in the above categories. However, there are other “red flag” items that can also increase your odds of being audited. These include:

• Claiming very large deductions in comparison to your reported income – For example, if you report $60,000 in gross income, but report $55,000 in deductions, this will attract added scrutiny.
• Taking commonly-abused deductions – These include home office deductions and business vehicle deductions, among others.
• Showing recurring losses for a business over several years – A net operating loss on a business for a year or two (especially in light of the last few years’ events) is understandable, but if you’re reporting a loss for several years in a row, the IRS will want to know why.
• Deducting business expenses that don’t align with your industry – For example, if you own a private gym, deducting construction equipment will almost certainly raise some eyebrows.

The IRS typically uses an algorithm to scan tax returns for these red flags. If your return is flagged, it’s then reviewed by a person, and your odds of being audited will increase. Please note that, if you do genuinely qualify for these deductions, you don’t have to avoid them simply to reduce your odds of being audited. The important thing is to ensure all of your numbers are accurate.

What Happens Now?

Now that you understand what might have triggered your audit, what can you expect to happen? Your audit will likely proceed one of two ways:

1. In-person audits – These types of audits are much more stressful than the second kind of audit, and if you’re being audited in person, you absolutely want to have an advocate on your side. An IRS agent will come to your home or business to review your records. They’ll primarily be focused on your financial records, your past tax returns, and any tax penalties you’ve incurred in the past. A CPA can help you ensure you have all the necessary documents and records properly organized and available for the agent’s review.
2. Correspondence audits – Though in-person audits may be increasing due to the tax enforcement push, correspondence audits are generally the more common (and always the less stressful) audit option. With this audit, you’ll simply receive notice from the IRS requesting additional information or documents to support a specific deduction or another item related to your tax return. You will simply send in the requested documentation, at which point one of three things will happen. They will either (1) decide your documents support what’s written on your return and nothing will change, (2) decide you owe more in taxes and suggest a change on your return, or (3) decide you paid too much and give you a refund.

In cases where the IRS says you owe more based on your documents, you do have the change to dispute their claim. You can choose to challenge the IRS assessment, and a conference will be scheduled with an IRS manager for further review. If you are going to dispute an IRS assessment, it’s a good idea to have an advocate on your side.

How a CPA Can Help

Regardless of the type of audit you’re receiving, you can have assistance on your side. A CPA can help you to organize your documents, ensure the IRS agent receives all the information they need, and support you if you dispute an IRS assessment. Contact the IRS Advocates today to learn more about how we can help you.