What Happens During an Audit?
- Jun 12, 2015 | Suzanne Kearns
Mention the word “audit” to most small business owners and it’s enough to send them into a panic. Horror stories of IRS agents auditing a business’ books and demanding thousands more in taxes are repeated like urban legends.
But the reality is that the IRS accepts most income tax returns just as they are sent. But if you are lucky enough to be notified that you’re being audited, here’s a rundown on what you can expect.
Did I Do Something Wrong?
According to the IRS, if you receive notice of an audit, it doesn’t necessarily mean that you did something wrong or made an error on your return. Audits are selected by random sample, statistical formulas, an income matching program, and a computerized screening program called the Discriminant Inventory Function System (DIF).
Sometimes businesses are selected for audits because they have transactions with other business partners or investors who are also being audited. So don’t panic. It’s probably just a random thing.
How Will I Be Informed?
When the IRS selects you for an audit, they will contact you by phone or letter. If the first contact is by phone, it is their policy to follow up that call with a letter. The IRS will never inform you of an audit via email, so if you receive such a notification, it’s likely a scammer looking for your personal information.
Where Does the Audit Take Place?
The IRS conducts audits in a variety of places. For instance, some audits are conducted by mail. If yours is conducted this way, you will receive a letter from the IRS asking for additional information about certain items on your tax return.
Other audits are conducted at the IRS office, your home or place of business, or at your accountant’s office. Normally, an audit takes place near where you live, but if your records are in another location, or if it’s just more convenient to meet somewhere else, you can request to change the location.
Do I Have to Be There?
You can represent yourself during the audit, have someone be there with you, or you can ask someone to represent you in your absence. The person must be a federally authorized practitioner such as an attorney, CPA, an enrolled agent, an enrolled actuary, or the person who prepared and signed your return.
If you want someone to represent you in your absence, you will need to fill out IRS Form 2848 (PDF), or any other written authorization form.
What Records Should I Bring?
When you are notified that you’re being audited, the IRS will inform you about which records you need to bring.
Remember to keep all records that relate to your tax returns for three years from the date they were filed, and your payroll records for four years. If you want to submit your records electronically, contact your auditor for permission.
What Rights Do I Have?
As a taxpayer, you have certain rights under the law. For instance, you are entitled to professional and courteous treatment by the auditor, a right to confidentiality and privacy, a right to understand why the agent is asking for information, the right to represent yourself or be represented by an authorized person, and a right to appeal the decision. IRS Publication 1 (PDF) goes into detail about all of your rights.
What are the Possible Outcomes?
There are three possible outcomes when you are audited. They are:
- No change. When an auditor agrees that your return is correct, the audit will result in no changes.
- Agreed. When the agent proposes changes to your return, and you agree that the changes are correct. You will be asked to sign the examination report, or another form, depending on the type of audit that occurred. If you owe money, you will have several options to pay it.
- Disagreed. When the agent proposes changes to your return, and although you understand the changes, you do not agree with them. If this happens, you may request a conference with a manager to get another review of your return. You can also file an appeal, attend one of the IRS’s Appeals Mediation Programs, or contact the Taxpayer Advocate Service, which is an independent organization within the IRS that helps taxpayers solve issues. Be sure to try to work it out with a supervisor before contacting this organization. Read more about it in IRS Publication 1546 (PDF).
Receiving notice that your business will be audited is never fun, but it helps to know that the IRS follows a specific format when conducting audits, and you have certain rights under the law. Should you find yourself facing an audit, Avalara Professional Services team offers a team of tax experts who can assist you with audit management and other sales tax related services.
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