Receiving an audit letter from the Internal Revenue Service (IRS) can be nerve-wracking and stressful. It’s important to understand what to expect during an audit — and how to prepare for one. Knowing how to respond to an audit letter can help ensure there are no complications and the process runs smoothly.
What is an IRS Audit?
An IRS audit is an official review of a taxpayer’s financial records and tax returns to ensure they are compliant with the tax laws. There are various reasons an audit may be conducted, including random selection, data entry errors, and discrepancies in a return. There are three types of audits that may be conducted by the IRS, including:
- Correspondence audits — These are the most common types of audits and are conducted by mail. The IRS will request additional documents to clarify specific items on your tax return.
- Office audits — Office audits are conducted in-person at an IRS office. These types of audits typically include a detailed review of your taxes and cover a wide range of topics.
- Field audits — In situations involving complex tax returns, the IRS may conduct a comprehensive field audit at your home or place of business.
An audit can conclude with no change to your tax return, an agreed-upon change, or a disputed change.
What Steps Can You Take to Prepare for an IRS Audit?
If you’ve received an IRS tax audit notice, it’s essential to remain calm. Receiving an audit letter doesn’t always mean you have done something wrong. In most cases, these notices are the result of a computer program that flags discrepancies, typos, and simple mistakes.
If you’ve received an IRS audit notice, here are the steps you should take to prepare:
- Read the IRS audit notice carefully — To prepare for an IRS audit, you should first review the letter carefully to know what the IRS is asking for. Not every letter from the IRS is an audit notice. The letter should outline what the IRS is reviewing and the documents requested to support those items.
- Review your tax filings — Review the tax return in question to understand what the IRS is looking for. Compare the records requested by the IRS with the return to identify any inconsistencies. This can ensure you are in the best position to address the IRS’s concerns and explain the discrepancies.
- Collect the requested records — It’s crucial to keep meticulous financial records in case the IRS ever audits you. Gather any documents requested by the IRS. These may include tax returns, bank statements, W-2 forms, 1099 forms, receipts, invoices, and other financial records. Make sure the records are organized by tax year and category to help expedite the process.
- Respond by the deadline — Don’t delay responding to the IRS. The audit notice should give you a specific timeframe to respond. Meeting all applicable deadlines is vital to avoid penalties. If you need more time to gather your documentation, you may be able to request an extension.
- Hire a skillful tax professional — Tax audits can be complex. It’s always best to have a knowledgeable tax professional who can help you navigate the process and ensure you provide the correct information. Trying to deal with an audit on your own can potentially lead to errors, missed deadlines, and a greater chance of penalties being imposed. A tax professional can also manage your communications with the IRS, assist with organizing your records, and represent you in any meetings with IRS agents.
After the audit, the IRS will provide you with a report of their findings. Be sure to review the report carefully. If you agree with the IRS’s findings, you can sign the agreement and arrange to pay any additional taxes that you owe. If you do not agree with the IRS’s findings, you have the right to appeal the decision.
Contact an Experienced Tax Professional
A tax professional can help alleviate your stress and ensure you avoid any pitfalls in preparing for an IRS audit. Based in Fairfield, Rolleri & Sheppard CPAs, LLP, provides IRS audit support to clients — and can help them take proactive measures to reduce the risk of being audited. Contact us online or call (203) 259-CPAS to schedule a consultation to learn how we can help.
