Four Types of IRS Audits and How to Deal with Them
November 20, 2018
IRS audits are thorough examinations of a tax account and financial information, performed to ensure that what was reported on the tax return is accurate and tax laws are being adhered to. Chances of getting audited by the IRS are slim. In fact, unless you have a very high income, your odds are less than one percent. It can happen though, so it is better to be prepared and hold knowledge of your rights and how audits work. If do end up becoming a part of that one percent, what will happen is the IRS will ask you for information and documents that explain your position on your tax return. It is important to not deviate from what the IRS asks, and to make sure to return clear and accurate information for the requested items.
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The IRS tries to audit tax returns shortly after filing, but can go back as far as three years. If for some reason there are additional or significant errors, the IRS usually won’t go back more than six years. However, to be on the safe side, it is recommended to keep all tax receipts for at least seven years.
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Now, there are four types of IRS audits you need to know about, and each one is prepared differently. The four different types of audits are correspondence, office or desk, field, and random audits. Here is what you need to know about the IRS audits and how to manage them as a self-employed entrepreneur.
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Correspondence Audit
Most IRS audits are actually done via mail which is called the correspondence audit, and requires a detailed, timely response back. A correspondence audit is the most common and simplest of the four audits. If you receive a correspondence letter, it will state the reason for the audit and even offer simple resolutions, completed through the mail.
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A correspondence audit means you will have to correct a portion of your tax return due to an accounting error. This will result in you having to pay in more or get refunded a certain amount. Once all requested information has been sent back to the IRS, this type of audit is generally resolved within a short time frame.
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Make sure to always have backup files and receipts in case you need to back up specific claims. Also, be sure to store a couple copies of all communication relating to the audit for future reference.
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Office Audit
Another audit is the office audit, also commonly referred to as a desk audit. It is completed at an IRS office, where an audit interview will take place with an IRS auditor. Office audits are used for issues that are too complex and large for a correspondence audit, but too small for a field audit. The auditor will request information relating to the specific issue under examination, as well as more general information like the financial position, employment, and lifestyle of the taxpayer.
The office audit is more serious than a correspondence audit, and requires more time. However, the good news is an office audit is generally completed within one day since most information will be supplied on demand. If you don’t have the information at the time of the audit, you’ll have time to supply any additional information that’s requested.
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If you are summoned for an office audit, it is strongly advised to hire a tax attorney to represent you during the audit.
Field Audit
There are the occasional face-to-face IRS audits though, which are called the field audits, and these will need a deep review of details to prepare for the audit interview. A field audit is the most serious of the different types of audits, because the issue for the audit cannot be resolved with a simple letter or office visit. In fact, the IRS comes to you and will visit your office to inspect and verify the legitimacy of the employees, workspace, and other business related expenses.
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In the case of a field audit, we strongly encourage business owners to hire a professional that can be an advocate for your business, and will be able to answer questions on your behalf. Bringing in an expert to represent you is always the best route to go.
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Random Audits
The last type of audits are random audits. In addition to traditional audits, you may be subject to a random review of your tax situation. The IRS will simply look at your tax return for inaccuracies during the audit process.
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This type of review is also generally done via correspondence letter with a notice that your account is being reviewed. If the review doesn’t turn up any red flags, no follow up letter will follow, and you are in the clear.
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In the case of a random audit, this shouldn’t cause too much alarm.
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So, those are the four basic audits in a nutshell. It is unlikely that you will be audited, but better safe than sorry. If you are notified you’re being audited, remain calm and have a talk with your tax professional. Usually these situations resolve themselves quickly and easily so you likely don’t have anything to worry about. Have more questions? Contact us via phone at (906) 774-4051 or email at Solutions@f-ccpa.com.