This is the next installment in the Reader’s Questions Series, which highlights questions emailed to me by you, the readers of Money Q&A.
Be sure to find out at the end of this article how you can receive a free copy of Dave Ramsey’s book, The Total Money Makeover if I feature your money question on the next blog post. If you’re not familiar with Dave Ramsey’s book, you should run right out and get it. It’s one of the top ten best personal finance books you should read.
Today’s question comes from Ben who asks about being audited by the US Internal Revenue Service (IRS).
What steps should you take after being notified that the IRS is going to audit you?
What happens if IRS audits you?
It can be scary to find yourself audited by IRS. What should you do? What are the first steps to take when you’re audited by the IRS? Here are the steps.
The vast majority of audits conducted by the IRS are what’s called, correspondence audits. That means the IRS sends you a letter that you must answer. Typically, the IRS asks about income from their records, 1099s, and the like that do not match what was reported to the IRS by your bank, employer, investment firm, or contractor.
Correspondence audits are low-level inquiries from the IRS, and they account for 80% of the audits from the IRS to American taxpayers. But, you should take the notice seriously. You need to respond within the allotted timeframe that the IRS sets in your audit letter, and you need to respond with the information that they have requested.
But, what should you do with a full blown audit? What steps should you take with an audit by IRS?
Full Blown IRS Audit
The next level is a full blown IRS audit in which an IRS agent looks at your income tax return and questions items that you have listed on your return. These full IRS audits tend to focus on taxpayers with higher incomes, small businesses, and the like.
Several instances can often trigger an audit sometimes. Some items that tend to earn extra scrutiny over an income tax return are small businesses that claim deductions for travel, entertainment expenses, home office expenses, and other deductions. For individual taxpayers, the IRS also tends to look at income tax returns that have a high amount of deductions for charitable donations.
The IRS can audit income tax returns filed within the past three years. They may also look back even further if they find a substantial error or fraud. The IRS could look back up to seven years in most instances if they chose to do so.
Look at IRS Publication 3948-A, The Examination Process
For more information, you should read IRS Publication 3948-A, The Examination Process (Audits by Mail). It tells you exactly what to expect with an audit and how you will need to respond to the IRS’ questions by mail. The publication can be a wealth of knowledge to help you navigate the audit process.
Check With Your Tax Preparer
In many instances, your tax preparer can help you if you audited by the IRS if you used a professional tax preparer or Certified Public Accountant (CPA) to file your income tax return. Many tax preparers offer audit representation as part of their service that you have already paid for when hiring them in the first place.
This wouldn’t be the case if you filed your taxes on your own by yourself. You may be able to hire a tax preparer after the fact now that you are audited to help you. It will cost you, though!
Consider Hiring a Tax Lawyer
You may want to consider hiring a tax attorney who practices specifically in the field of income taxes to help you. It will be costly, but depending on how much you may owe the IRS, it could be money well spent in the end.
Some states have attorneys who are board certified in tax law. They can help you understand your rights and ensure the IRS stays within the proper scope of the audit. During that process, your attorney can also provide you with legal counsel and/or negotiate a settlement with the IRS if you owe a large tax bill.
IRS Taxpayer Advocate Service
If you feel a case was mishandled or the facts don’t support the audit that the IRS has brought against you, you can also consider contacting the IRS Taxpayer Advocate Service. The Taxpayer Advocate Service (TAS) is your voice at the IRS. The office can ensure you are treated fairly, and they will ensure that you know and understand your rights before, during, and after an IRS audit.
If you are having tax problems and have not been able to resolve them with the IRS, you may be eligible for free TAS assistance. The IRS Taxpayer Advocate Service understands that the audit process can be confusing. But, the worst thing you can do is nothing at all!
What about you? Have you ever been audited by IRS? What steps did you take? What happens if IRS audits you? I’d love to hear from you.
Past Readers’ Questions:
- How To Prioritize Which Bills To Pay First
- Should You Put Your Emergency Fund In Mutual Funds?
- How Do You Start Saving If You Live Paycheck To Paycheck?
- How To Find A Payment Plan Without Cutting Necessities
- Is My Money Safe In A Bank?
- What To Invest In After The Company Match
Do you have a money question that you would like to ask? Email me your money, investing, retirement, savings, or other question to Questions[at]MoneyQandA.com.