About Tax Audits
There are few things people fear more than tax audits. Even if you are the type of person that is meticulous about claiming your earnings and only taking legal deductions, tax audits can be stressful and intimidating. One of the main reasons people fear them so much is because they do not actually know what goes on during a tax audit.
Types
There are generally three types of audits -- correspondence audits, field audits and office audits. The IRS conducts correspondence audits for the most common problems on a person's tax return. These problems typically include missing forms, mathematical errors and illegible writing. The correspondence audit generally consists of the IRS sending you a notice stating the problem and asking you to fix it and send it back. For instance, if you deducted a meal on your tax return, the IRS may ask for a receipt from that meal or proof that it was business-related. The second type of audit is a field audit. This is where an IRS agent comes to your home or business to verify your tax information. The IRS mainly conducts field audits to verify something, such as the amount of paper you go through at your business or the amount of ink you go through. The third and often most feared tax audits are the office audits. This is the type in which the person being audited must go to the IRS examiner's office. After examining your records and information, the auditor will give usually give you a 30-day letter that details the findings or mail it to you after the examination.
Preparations
The best way to prepare for an IRS tax deduction is to start at the beginning of each year. Keep any receipts and documents related to your business or your taxes. Keep a separate envelope or file to keep your records in so you do not misplace them or get them confused with unimportant documents. The IRS will expect you to have at least your bank statements, canceled checks and any electronic records related to your business. Also, any log books, records and appointment books will help your case when being audited. Keep everything organized and do not make the IRS agent guess about anything. The more information you have to support your deductions, the more likely you are to survive the audit with fewer problems. Receipts are also important for personal tax audits that are not business related. If you give something to charity and deduct it on your taxes, keep the receipts. Many audits occur because people claim to give money to charity but they have no proof to support their claim.
Warning
If you are required to have your audit at an IRS office, be sure you arrive on time. Also, do not dress flashy or wear a lot of jewelry as this could hurt your case. Simply arrive in a casual outfit and be polite. The IRS agents are just trying to do their job and your audit may be nothing more than simplifying some documents or proving legal deductions. Many times, the certified public accountant who did your taxes will come to the audit with you or they will send a representative from their company to be by your side.
Time Frame
Tax audits generally occur within three years of the tax year. For instance, you generally will not be audited for the 1997 tax year in 2003. However, experts at Bankrate.com suggest keeping your tax records for as many as seven years. Even though the IRS cannot audit you after three years, they can still challenge your return if they feel you have not reported your entire income.
The actual audit can also take up to one year to complete. From the date you get the first correspondence from the IRS, you have 30 days to either agree with the findings or make an appeal that disputes the findings. If you appeal, the IRS sends you a 90-day letter which gives you that amount of time to request your case be taken to Tax Court. Just remember that if the findings are correct, you will be responsible for any taxes and penalties accrued throughout the entire process.
Red Flags
Most people do not have to worry about tax audits. In fact, the IRS only examined about one percent of the returns in 2007. There are some red flags that will cause your return to get noticed and possibly audited, though. For instance, people who work for tips (such as servers or hairdressers) often get audited because the IRS assumes they do not report their entire income since much of it is cash. Also, if you have a small business and your income drops from one year to the next or you have a huge number of deductions that you did not have before, it will raise a red flag with the IRS. The IRS may also examine your return more closely if you have a large number of charitable deductions or if they get an anonymous tip that you may be trying to cheat or defraud the IRS.
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