An audit is a review of your tax return and supporting documents by an agent from the IRS. If ever you happen to become subject to the IRS audit, usually, you know about it from an audit letter.
When you receive an audit letter, the IRS might have identified some areas of concern with your tax return. This does not necessarily mean that you have done anything wrong; it might just mean that there’s something about your specific situation or the way you organized your information that raises a red flag for the IRS.
What Should I Do if I Receive an IRS Audit Letter?
The first thing you should do is don’t panic! Hiring a tax professional is one of the best ways to get through this process smoothly. They will be able to tell you what the letter means and what to expect moving forward. This letter is your sign to get organized. If you’re like most people, you probably keep your receipts and other paperwork in a haphazard pile in a drawer somewhere. As the IRS will be looking at your records, such as your receipts and other documentation, you must keep them organized. What does this mean for you? It means you need to get yourself a good filing system and start organizing your papers.
What Does an Audit Letter Look Like?
The IRS audit letter will outline the reasons for the audit and the documents they need from you. It will usually list the documents they need from you, such as receipts and bank statements, and it will also list the timeframe they expect you to respond. This is where your organizational skills will come in handy. Make sure that you have these documents saved and are easily accessible.
When Will You Know Whether an IRS Letter is a Good or a Bad Thing?
It is where things get a little tricky. There is no hard and fast rule for what the IRS is looking for, and there’s no way to know if you are in the clear. It is because the IRS has a set of standards to determine the accuracy of the return. Standards are not equal to laws or rules, so they are a little more subjective.
What to Expect from an IRS Desk Audit
A desk audit means the agent will review your tax return and supporting documents — such as receipts and bank statements — in the office. During the review, the agent will red-flag anything that doesn’t add up and send you a letter requesting more information or asking you to visit the local IRS office to discuss the discrepancies.
This way, if there are any issues with your return, expect to receive a letter from the IRS requesting more information. This letter will list the areas that need clarification, such as missing documentation or incorrect figures.
What to Expect from an IRS Field Audit
A field audit is a little more in-depth than a desk audit. An agent will ask you to bring records to their office and will review them in their presence. Field audits usually involve a review of your business records, such as receipts, inventory, and other expenditures. Field audits can also happen for high-income earners and taxpayers with complex tax situations.
How Can You Respond To An IRS Letter?
The best thing you can do is be honest, open, and transparent with the agent. Hiding things will only make things worse. The IRS is not interested in making your life difficult; they are simply trying to ensure everyone’s paying their fair share.
If there is something incorrect on your return, the best thing you can do is own up to it. The IRS will appreciate your honesty. If anything doesn’t add up, you can explain why. They are not expecting you to be perfect, and they will appreciate your openness and transparency.
The IRS audit process can be a stressful and confusing experience, but it doesn’t have to be. By being organized, honest, and prepared, you can make this process as painless and simple as possible. When you get that letter from the IRS, take a deep breath, don’t panic, and get yourself organized. Then, sit down with your tax preparer and go through the letter together. The IRS audit process is there to ensure that everyone is paying their fair share, and if you are honest and transparent with them, they will appreciate it and things will go smoothly.