Have you ever worried that you might get audited by the IRS?
As a result of budget cuts, you are not likely to be audited by the IRS. In fact, the chances are less than one percent that your tax return will be audited. Robert McKenzie, someone who used to work in the IRS collections department, says that people with high incomes and those who are self-employed are the ones most likely to be audited.
There are some things that could make your tax return look worthy of an audit, though. If you or a spouse has a small business that seems based on a hobby, the IRS might want to have a closer look. Or, if the number of dependents you claim tends to shift year by year, this could also raise some eyebrows. There are other such circumstances that may result in an IRS audit as well.
Upon receiving a letter from the IRS, you may feel a little trepidation and worry. But try to remain calm and gather yourself. You will be afforded a couple months to gather the necessary information for an IRS branch.
So if the IRS comes knocking at your door, what should you expect and what should you do?
3 Types of Audit: Mail Correspondence Audit, Office Audit and Field Audit
By far, the most common form of audit is the mail correspondence audit. The taxpayer just sends the necessary documentation showing the specific information needed by the IRS. This common audit is the least time-consuming and is not very intimidating at all.
The office audit requires involves meeting face to face with someone in an office and lasts no more than four hours. The audit is not an exhaustive audit, since the IRS is only looking for some limited information.
When people think of a fearful audit, what they have in mind is the field audit, which is often held in the actual business of the one being audited. The audit is very detailed and thorough and can take several hours.
What Do I Do?
First of all, you need to be honest with the IRS. Confine yourself to what the auditor wants to know, since providing additional information will only lengthen the process and may lead to many more questions.
The auditor will appreciate your honesty and cooperation because their job will be a lot easier. Other people can get very hostile and impatient, hurting themselves in the process.
Arm yourself with all necessary documentation and the reasoning for your tax decisions. Be as well informed as possible. Be confident of your compliance with all the rules and regulations and be sure to state your case. Show the IRS why you believe you are within your rights. Do not be afraid to appeal to a higher authority in the office because you could end up getting the break you are looking for.
Worst Case Scenario?
So what if you are found to be in non-compliance? Do you have to worry about going to jail for tax evasion? Probably not.
Jail time is reserved only for those who are willfully negligent and are clearly trying to scam the authorities. The offense has to be pretty extreme to merit any sort of jail time. But an audit can be very expensive. The IRS will make the necessary adjustments to your return and will collect on the actual amount that you owe after all adjustments have been made. You may end up paying accumulated interest charges as well.
The IRS can also tack on a stiff penalty of up to 20% in the case of egregious mistakes that have no reasonable explanation. However, there is not much to worry about if you cooperate and your discrepancies are fairly understandable and minor.
Needless to say, if you feel you need a legal representative to advocate for you, there will be additional expenses on top of the audit. The important thing is to pay the IRS what you owe. They have the capability to put tax liens against you and garnish your wages.
What if I Haven’t Kept Good Records?
It does not have to be too difficult to gather everything you will need. Most documents, such as W-2 forms or old tax returns, can be collected from employers, banks, or even the IRS. You should have access to all that you will need. You just have to gather it from the necessary sources, and you will be given plenty of time to do so. If you need extra time to gather the paperwork, then you can just ask.
You will want to gather everything you can think of that documents your expenses and key money transactions. If you cannot support what the IRS is asking about, then you will probably have extra money to pay to the IRS. But if you are well-prepared and can show yourself to be within their regulations, then you should be just fine.