When most people hear the word audit they immediately feel fear and confusion. The images that have been cast by Hollywood and the media always attach a negative connotation to the concept. Very few people, however, actually know what an audit is. Sometimes it’s as simple as a paperwork request, but tax audits often happen years after the return in question, so it can be hard to find all of the necessary receipts and documentation required.
Contrary to popular belief, an audit does not immediately imply any criminal activity on your part. There are different types and some can even be completed through the mail. Sometimes the reason for an audit can be completely random, generated by an algorithm designed to choose a small percentage of tax returns per year. Sometimes there’s a flag generated based on your tax return compared with the norm for your demographics. These might include abnormal business deductions or unusual income.
There are three types of audits, ranging in severity. A correspondence audit is the least stressful and can often be corrected through correspondence. The reason for this low-level audit is usually because of a routine error, such as missing documentation or a mathematical error.
A slightly more in-depth audit is called an office examination audit. These occur when your deductions and/or reported income are called into question and need to be verified. Rather than through correspondence, these generally take place in-person at a local IRS branch.
A field audit is the most extensive type of examination. An IRS agent will make one or more visits in-person to your home, accountant, or your place of business in order to examine records and files. This is a much more thorough approach that checks every line of your tax return to ensure the information is correct.
If you have nothing to hide, it’s important to be fully cooperative and remain calm and cordial throughout the auditing process. Remember that the IRS agent has a job to do and that this isn’t personal in any way. That being said, you have the right to fair treatment. You will be notified in advance about an upcoming audit and the exact information that will be needed. You have 30 days to respond. The more organized you can be prior to an IRS agent starting on your case, the faster and smoother the audit will proceed. Once the audit is complete, you will have the right to appeal if need be.