Getting a notice from the IRS informing you that you’re being audited can possibly be the worst feeling in the world. No matter if you did everything right, extreme worries will still invade your mind.
Thoughts may race: “Did I make a mistake?” “Will I owe money?” “Do I need a lawyer?”
While tax audits can be stressful, they don’t have to be overwhelming if you’re prepared and understand your rights.
This article provides a clear, step-by-step guide to tax audit defense, including how audits work, what to expect, and how to protect yourself using tax defense strategies if the IRS comes calling.
What Is a Tax Audit?
A tax audit is a review or examination of your tax return by the Internal Revenue Service (IRS) to ensure all reported information is accurate and complies with tax laws. Audits are meant to verify that your income, deductions, and credits are legitimate.
Audits can be triggered by:
- Mathematical errors or inconsistencies
- Unusual deductions or income amounts
- Discrepancies between reported income and third-party data (like W-2s or 1099s)
- Random selection using IRS algorithms
Types of IRS Audits
The IRS conducts audits in several ways, and understanding the type of audit can help you prepare accordingly. Here are some kinds to be aware of:
1. Correspondence Audit
This is the most common and least invasive audit. The IRS sends a letter requesting specific documents or explanations. These can usually be handled by mail.
2. Office Audit
You are asked to visit an IRS office to provide records and answer questions. These are more detailed and may involve multiple parts of your tax return.
3. Field Audit
The most comprehensive type, where an IRS agent visits your home, business, or accountant’s office. Field audits involve in-depth investigations and are typically reserved for more complex returns or significant discrepancies.
What to Do When You Receive an Audit Notice
The most important thing to do when you receive an audit notice: Don’t panic.
An audit doesn’t mean you’ve done something wrong. Many are resolved with a simple explanation or clarification. Here are some other steps to take:
Read the Notice Carefully
The IRS will tell you what they are examining, what documents they need, and how to respond. Make sure to note the deadline for your response.
Gather Relevant Documentation
Start collecting the documents that support your return. This may include:
- W-2s, 1099s forms, and bank statements
- Receipts for deductions (medical expenses, charitable donations, business expenses)
- Mileage logs or travel records
- Contracts or invoices for independent work
Keep things organized and only provide documents that are requested.
Contact a Tax Professional
Even if the audit seems minor, it’s wise to consult a tax professional such as a CPA, enrolled agent, or tax attorney. These audit representation services can help you prepare your documents, represent you in communications, and protect your rights.
Respond Promptly and Accurately
Never ignore an audit notice. Delays can lead to additional penalties.
If you need more time, request an extension in writing. Always be honest and clear in your responses in IRS audit preparation.
Your Rights During an IRS Audit
You have important rights as a taxpayer, including:
- The right to representation by a qualified professional
- The right to know why the IRS is auditing you
- The right to appeal disagreements within the IRS or in court
- The right to privacy and confidentiality
- The right to a clear explanation of any decisions or changes
The IRS publishes a “Taxpayer Bill of Rights” to help individuals understand what they can expect during an audit.
Common IRS Audit Red Flags
While audits can be random, certain factors may increase your chances of being audited:
- High deductions that don’t match your income
- Large charitable donations
- Home office deductions
- Reporting losses from hobbies as business expenses
- Failing to report all income (including from side gigs)
- Excessive business meals or travel expenses
- Cryptocurrency transactions not reported
Being aware of these can help you avoid unnecessary scrutiny in the future.
Audit Defense Strategies
If you’re being audited, there are effective tax defense strategies for defending yourself. Here are some to be aware of:
1. Keep Meticulous Records
Good recordkeeping is your best defense. Keep your receipts, invoices, bank statements, and tax forms for at least seven years. Organize your documents in advance to show the IRS you are prepared and cooperative.
2. Stick to the Facts
Be respectful but stick to answering only what’s asked. Avoid volunteering unnecessary information that may raise new questions.
3. Don’t Go It Alone
Having a tax expert or audit representation services by your side, especially for field or office audits, can prevent missteps. They understand tax law and know how to speak the IRS’s language.
4. Be Honest and Transparent
If you realize you made a mistake, be upfront. In many cases, the IRS is more lenient when taxpayers acknowledge errors and work toward resolving them.
5. Understand the Appeals Process
If you disagree with the audit findings, you can appeal. First, request a meeting with the auditor’s supervisor. If unresolved, you can appeal to the IRS Office of Appeals and even to Tax Court.
What Happens After an Audit?
After reviewing your records, the IRS may:
- Accept your return as-is: No changes are made.
- Propose changes: You’ll receive an examination report outlining the adjustments and any additional taxes, interest, or penalties.
- Request payment or issue a refund:
- If changes result in more tax owed, you’ll be given options to pay.
- If you overpaid, the IRS may issue a refund.
You have 30 days to agree or disagree with the findings. If you disagree, you can request a conference or file a formal appeal.
Tax Audit Defense Strategies – You Have Us On Your Side
A tax audit doesn’t have to be a nightmare. With preparation, professional support, and a calm, organized approach, you can handle an IRS audit with confidence.
Need more help with tax audit defense strategies? STS 1 STOP Tax Solutions is here to help. We assist tax preparers and aspiring tax professionals in starting and managing their tax businesses.
If you are dealing with an IRS audit, the first thing you should do is contact our team. Don’t delay; let us help you deal with this audit in the best manner possible.
