Why an IRS audit doesn’t have to be scary
The word “audit” is a very scary word to people. How could it not be? We conjure up an image of having to provide a substantial sum of money to the government that, even in the most perfect economic times, is a daunting task. Though you will never see me volunteer to go through one, the reality is that we do not need to be afraid of audits.
There are three different types of IRS audits:
• Correspondence: The taxpayer receives a letter in the mail requesting information and has the opportunity to mail back his or her response and documentation by a designated date.
• Office: The taxpayer receives a letter in the mail stating that an audit is scheduled to occur and provides the date, time and location of the local IRS office, and what documentation to bring.
• Field: The taxpayer receives a letter in the mail stating that an audit is scheduled to occur at the location of the taxpayer on a designated dated and time and outlines the information the IRS will review at the time of the audit.
An important fact to remember is that a taxpayer may request in writing to have the type of audit changed. A reason for the switch may be as simple as the taxpayer may rather have the audit performed on his or her turf vs. bringing several boxes of information to the IRS office.
Rescheduling the date or time of an audit is available but they can be costly and are frowned on by the IRS. However, the IRS will reschedule audits if the taxpayer has information scattered in several locations and needs additional time to organize and put documentation together or a medical emergency erupts that the taxpayer had no way to plan for.
If a taxpayer does not have all documentation together in time for the audit, then the taxpayer may proceed with the audit and provide what he or she does have at the time of the audit. The taxpayer may request to schedule a follow-up exam and provide the remaining documentation at that time. The auditor can limit or expand the scope of the audit based on the initial meeting.
If the taxpayer files an amended tax return at the time an audit is scheduled, then the taxpayer may present that amended return for review and possible cancellation of the audit and an immediate audit report.
The IRS prefers to complete audits at the field and office examinations. The IRS permits a taxpayer representative (i.e. tax preparer) to be present at the audit. There are representatives who prefer to attend the audits without the taxpayer due to concern the taxpayer may “lend” too much information to the IRS. The IRS will conduct audits of a particular taxpayer until the taxpayer has a clean tax return (i.e. there are no red flags in the return).
So what happens when a taxpayer owes the money and knows that he or she will have trouble paying? The IRS fully acknowledges the tough times the country is facing and is providing flexibility on collecting the money that is legitimately owed. This means that the auditor has the flexibility to devise a payment plan for the taxpayer that meets his or her budget.
Interest will accrue, so it is in the best interest of the taxpayer to pay it back as soon as possible. If the auditor reviews all the information and realizes that paying any money would be a severe hardship for the taxpayer, then that is taken into consideration by the auditor and IRS.
What helps an audit to proceed smoothly?
• Good quality documentation (keep your receipts, bank statements, invoices)
• Documentation that is in a logical order (figure out a good filing system and stick with it).
Remember, audits are costly for the IRS, so they want to complete the audit as quickly as possible. The fewer delays the better. Once the audit is complete, the IRS will provide an audit report with its findings, adjustment/recommendations and what is financially due (if applicable).
If a taxpayer receives the audit report and they have questions, then feel free to speak with the auditor or manager for thorough answers. If an adjustment/recommendation seems incorrect on the report, then the taxpayer should feel free to question it or file for an appeal. Time is of the essence in this matter, so a taxpayer will not want to wait to question an item in the report. The sooner questions or concerns are resolved, the better for the taxpayer and IRS.
The long and short of it: Despite perceptions, the IRS really does want to work with taxpayers because at the end of the day the IRS wants its money and taxpayers want to live a peaceful life.
Gina M. D’Orazio, owner of D’Orazio Bookkeeping, Littleton, can be reached at 603-444-7196 or email@example.com.