The percentage of tax returns being audited each year has steadily declined, due in part…
The first reaction by most taxpayers when they find out they are being audited by the IRS is crippling fear. An audit occurs when the IRS has reason to believe that the tax you paid is not what should have been collected. The IRS wants to investigate how you calculated your tax due for the year. If you have received a letter in the mail from the IRS, take a deep breath and don’t immediately panic. You might not even have to meet in person with the IRS, depending on the type of audit.
There are three main categories of IRS audits: a correspondence audit, a field audit, and an office audit. A correspondence audit happens via the mail. The field audit happens in person in your place of work or home. An office audit happens in person at your local IRS office. Read on to learn more about each of these three different types of audits.
The most common type of IRS audit is a Correspondence Audit. This type of audit is exactly as it sounds. The IRS requests certain supporting documents and files through the mail from the taxpayer. While responding to these requests might sound simple, hiring an attorney to assist with crafting the right response and ensuring the proper documents are provided is imperative. Allowing a seasoned professional to handle the communication with the IRS should make the audit process more efficient and will cut down on the number of back and forth communications with the IRS. The longer the audit drags out, the greater amount of interest that will be applied to proposed adjustments (if any) that arise out of the audit.
Another type of IRS audit is a Field Audit. The IRS has agents assigned to certain territories, types of businesses, certain industries, or individual tax issues. During a field audit, IRS agents will come to your company’s office or your home and look through your accounting files and documents. This type of audit differs from a Correspondence Audit because it is done in person. Even though field audits are sometimes faster, unfortunately, your employees or coworkers might know that you are being audited because of the in-person or in-office requirement. This can create an awkward working environment and bring into question the quality of documents prepared or maintained by accounting and finance employees. Field audits generally only occur for businesses or individuals with larger taxable income.
The final type of IRS audit is an Office Audit. These audits occur in person as well. However, the taxpayer is required to meet in the IRS office with an agent at a specific date and time. These types of audits are generally for complex tax issues or larger tax concerns. These audits often occur because the IRS suspects the taxpayer of big tax issues. Oftentimes, the IRS will attempt to get the taxpayer talking about a number of issues that might open up additional tax questions. Because these audits occur in person and inside the IRS office, taxpayers should have legal representation at these meetings. Keeping the responses brief and allowing a third party to handle most of the communication at these meetings is a great best practice.
Taxpayers should handle an IRS audit notice with care and concern. As mentioned, just because a taxpayer receives a notice does not mean they will have to meet in person with an IRS agent. Understanding the different types of IRS audits is essential to crafting the correct plan of action for a taxpayer.
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