The first thing you need to know if you receive and IRS Audit Notice is DO NOT PANIC! Finding one of these letters in your mailbox can be terrifying and stressful, and can immediately have you asking, “why me?”
There are a myriad of reasons that you could have been chosen for an Audit. It does not automatically mean that you did anything wrong or illegal. The majority of Audits are chosen by the IRS computer system. There are certain criteria that will flag your return in the IRS computer system. Some of these include: (but are not limited to)
- Excessive itemized deductions
- Cash or tips in your business
- Large charitable donations
- Higher than normal business expenses
- Unreported taxable income
- You are a partner or shareholder in a business
- Tax deficiency or a prior audit
As long as you did nothing intentionally illegal, you should not panic! You should however contact a tax professional immediately to assist you with the preparation for the audit.
If you have been audited in the past, you are much likely to be flagged for audit again! Unlike lightening, Audits do strike twice and three times!
If you have been involved in a criminal investigation involving large dollar amounts this will certainly flag you for an IRS Audit Notice.
Often times, audits are prompted because someone has reported you as being fraudulent on your tax return. This could be an ex-spouse, law enforcement, business associates, former employees, former partners, etc.
Also, be aware that the IRS selects 50,000 taxpayers every 3 years to be audited due to the IRS compliance measurement program. You may just have been one of the unlucky taxpayer to get chosen for this requirement.
Once you receive your IRS Audit Notice, read it carefully! Generally you have 30 days to respond. Failure to respond can result in the IRS taking it upon themselves to decide how much you should owe and sending you a bill! This amount can be MUCH higher than the cooperated audit would have determined.
The IRS Audit Notice will tell you what items on your return are being examined. This information is crucial to you in preparing for the audit. You will know specifically what items need to be proven with documentation, receipts or proof. When you contact a tax professional to assist you with the audit they will be able to assist you with gathering the needed documentation.
It is important that you only provide information and documents that directly relate to the item on your tax return that is being examined! Do not bring documents that have nothing to do with the audit! Also only bring copies to the audit; you will need to keep your originals as back up for future proof.
Take the advice of hiring a tax professional to assist you with preparation for and during the audit! You do not want to go this alone! The tax professional will know exactly what needs to be addressed and will make the audit go smoothly. Stay calm, hire a tax professional and as long as you were honest on your return, you will be fine!