If you’ve ever known anyone who’s gotten audited by the IRS, you’ve no doubt heard horrific tales. Yet being on the receiving end of an IRS audit is not as prevalent as you might think.
“Fewer than one in 100 taxpayers are audited by the IRS each year, and the overwhelming majority of those audits are by mail, not in person,” says Eric Smith, a spokesperson for the IRS.
He says there are many other types of notices sent by the IRS, and many taxpayers mistake them for audits. One is a “math error” notice, which is just part of processing a return. The second is a “document-matching” notice (usually referred to as the CP 2000), where IRS matches third-party reports — such as W-2 and 1099 forms — to what you’ve reported and generates a notice when there is a mismatch.
“It’s quite common for people to say something like, ‘Oh, I’m being audited by the IRS,’ but when you drill down, you find that in many, if not most cases, they actually received one of these other contacts that are not an audit,” explains Smith. “During the 2019 federal fiscal year, ending on September 30, 2019, the IRS closed fewer than 800,000 individual and business audits. In contrast, we closed nearly 2 million cases involving a CP 2000.”
But what if you get an actual audit letter? Here’s how to handle it:
Stay calm.
Just because you’ve been audited doesn’t automatically mean you’re in hot water or will owe any money. Instead of going into panic mode, read the notice carefully and logically. Most audits take place via written correspondence and won’t require you to meet with an auditor in person.
Don’t put your head in the sand.
“When you get a letter or notice from the IRS, don’t ignore it,” says Smith. “Open it — it won’t get better with age. Then, depending upon what’s involved, take action.” Also, the IRS will ask for information and documents by a specific date, and you don’t want to miss that deadline.
Determine if it’s really an audit.
As mentioned, not all correspondence from the IRS is an audit. According to John R. Dundon II, enrolled agent (EA) and president of Taxpayer Advocacy Services Inc., there are two kinds of audits: civil examinations and criminal examinations.
Civil examinations are initiated in writing via U.S. Mail, sometimes certified. You will not get a phone call, text, or email. A criminal examination, on the other hand, “are first ‘realized’ by a taxpayer when enforcement authorities pay a personal visit,” says Dundon.
It may not be federal. “Lately, taxpayers are not getting audited by the IRS as often as they have in the past, but state and local governments are ramping up tax compliance enforcement budgets in a big way all across the country,” says Dundon. “State and local government auditors are the most fierce.” Just because the audit isn’t coming from the IRS, doesn’t mean it shouldn’t be taken equally as seriously.
Get guidance.
There’s no reason to go it alone when it comes to an IRS audit. “Seek out help for understanding the scope of the tax audit, preparing your responses to their questions, and efficiently and effectively advocating your tax return position,” says Dundon. “Getting quality experienced help out of the gate cannot be emphasized enough,” he advises.
Focus on facts.
Now is not the time to let your emotions get the best of you. “Allow the data and evidence to drive your defense,” says Dundon. At the end of the process, you’ll either owe the government money, the government will owe you money, or the auditor will accept the original tax return.
Be patient and professional.
Be professional with IRS employees. “Regularly and consistently exercise patience and understanding,” Dundon advises.
The scope may increase.
Unfortunately, an audit can be a bit like Pandora’s box. “Once an examiner finds something suspect, they have an obligation to broaden scope and authority of an existing audit to more back tax years and/or other tax matters,” says Dundon.
You have rights. “If you disagree with the results of their findings, request a manager meeting,” says Dundon. “If that doesn’t work, appeal to the appropriate venue.”
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