What Happens During an Audit
Individuals and businesses are randomly selected for federal audits all the time.
When this occurs, the taxpayer will receive an audit notification letter in the mail, which will generally give an overview of what documents and records are needed for certain tax years.
How does this happen?
After a taxpayer files a tax return with the IRS, auditors have up to 3 years to audit their return to assess additional tax.
However, if the IRS identifies a substantial error, they can add additional years (generally not over 6 years).
If selected for an IRS audit,
the taxpayer should gather together their records and prior year tax returns so they are prepared for the audit.
Once the taxpayer is notified of the audit, an examination will be conducted by mail or in-person through an interview and review of the taxpayer’s records.
The interview may be at an IRS office or at the taxpayer’s home or place of business.
It is important to note that the IRS will never initiate an audit over the phone.
Many recent IRS scams have been done through calling taxpayers and informing them that they are under audit. The IRS will never initially contact taxpayers by phone- more information regarding these IRS scams can be found here.
The IRS routinely pulls individual and business tax returns to ensure that tax documentation is being accurately reported.
Audit selection is generally a random process; however, glaring issues such as tax avoidance will trigger an audit.
Also, if the taxpayer is involved in transactions with business partners or investors that are already under audit, then it will likely result in their returns being selected for audit as well.
The audit notices will request additional information such as the taxpayer’s income, expenses, itemized deductions, etc.
Per Internal Revenue Code §6001, the IRS has the authority to require any person to produce documents or records to show whether or not such person is liable for tax.
Read the second half Friday !… to learn about tax professionals and record keeping.
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Written By: Nushin Zarrabi