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IRS Audit

What is an IRS Audit?

An IRS audit is a formal examination of your tax returns by the Internal Revenue Service (IRS) to verify accuracy, ensure compliance with tax laws, and detect potential errors, omissions, or fraud. Audits can occur for various reasons, such as discrepancies in reported income, deductions, or credits, or through random selection. Not all audits result in changes to your tax liability; many are resolved without additional taxes owed.

Types of IRS Audits

The IRS conducts audits in different ways, depending on the complexity and scope:

  • Correspondence Audit: The simplest type, handled by mail. The IRS sends a letter requesting documentation for specific items (e.g., a deduction). You respond with proof, and it’s often resolved quickly.
  • Office Audit: You meet with an IRS examiner in person at a local office to discuss and provide records for a few items.
  • Field Audit: An auditor visits your home, business, or place of work for a more in-depth review, often involving multiple years or complex issues like business expenses.
  • Automated Underreporter (AUR) Program: Uses data from third parties (e.g., W-2s, 1099s) to check for unreported income; resolved by mail or online.

Audits can be for individual returns, businesses, or partnerships. The IRS selects returns via computer scoring (DIF score) based on factors like income levels, deductions, and industry norms.

How Audits Are Triggered

Common triggers include:

  • Mathematical errors or inconsistencies in your return.
  • High deductions relative to income (e.g., charitable contributions over 10% of AGI).
  • Mismatched information from third-party reports (e.g., banks reporting interest not on your return).
  • Random selection or IRS initiatives targeting specific groups (e.g., cash businesses).
  • Tips from informants or related audits.

Only about 0.5% of individual tax returns are audited annually, per IRS data.

Preparing for an IRS Audit

     If audited, stay calm and organized:

    1. Respond Promptly: Reply to any IRS notice within the deadline (usually 30 days) to avoid penalties.
    2. Gather Records: Collect supporting documents like receipts, bank statements, invoices, and tax records. Keep everything for at least 3 years after filing (or 7 years for claims of loss).
    3. Understand Your Rights: You can appeal decisions, and the IRS must follow procedures. Consider consulting a tax professional, CPA, or attorney for complex cases.
    4. Know the Process: Audits can take months. If changes are proposed, you can agree, appeal, or go to tax court.
    5. Avoid Common Mistakes: Don’t ignore notices, provide incomplete info, or argue aggressively—politeness helps.

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