There are few words that scare taxpayers as much as “tax audit.” If you have recently received an IRS audit letter, it is common to feel terrified and confused. However, having a knowledgeable tax lawyer on your side can help give you the peace of mind of knowing that you have a strong advocate in your corner who will work diligently to protect your rights. If you recently received an IRS audit letter, consider contacting Damiens Law at our Mississippi office by calling (601) 957-9672 or our Tennessee office by calling (901) 499-4466.
What is an IRS audit?
According to the Internal Revenue Service (IRS), an IRS audit is a review or examination of a taxpayer’s records. The IRS conducts audits to ensure information was correctly reported to the agency in accordance with tax laws and to verify the amount of tax a taxpayer paid is correct.
What is an IRS audit letter?
An IRS audit letter informs the taxpayer that their tax account is being audited. It explains the following information:
- Why the audit is being conducted
- Which information the IRS is reviewing
- Additional information the IRS wants the taxpayer to provide
- Any other steps the taxpayer needs to take
- The deadline to respond to the audit notification
Types of IRS audits
The IRS uses various types of audits. The one you may be receive notice of will depend on the circumstances. Common types of IRS audits include:
- Correspondence audit – With this audit, an IRS agent will request that you provide additional information to support your tax return, including receipts or canceled checks.
- Office audit – An office audit requires the taxpayer to bring specific documents into their local IRS field office. The audit is conducted at that location.
- Field audit – A field audit occurs in the field, such as at the taxpayer’s home or place of business.
- Taxpayer Compliance Measurement Program audit – This is an extensive type of audit that requires every item to be supported by clear documentation.
The particular type of audit you are subject to will have particular requirements. You may need to provide different information or send them to a different location, depending on the type of audit.
Is it common to receive an IRS audit letter?
No. It is not common for taxpayers to receive an IRS audit letter. According to the Transactional Records Access Clearinghouse, of the more than 160 million tax returns filed in 2021, the IRS conducted an audit of just over 659,000, representing just over 0.4%.
What does receiving an IRS audit letter mean?
If you receive an IRS audit letter, there may be a mistake on a recent tax filing. The IRS may ask you to explain or verify information on your tax return, such as:
- Unreported income
- Filing status
- Deductions or credits
If you made a mistake on your tax return, the audit process can provide a way for you to correct it. The IRS tax examiner can look at the original information and any additional information you provide to conduct an independent analysis.
However, if you are unable to verify information included in your tax return, an IRS tax examiner may determine you owe more in taxes. The examiner may add penalties. You may have various options to pay off your tax debt. An experienced tax attorney from Damiens Law can discuss the options available to you, based on your particular circumstances.
Why was I selected for an audit?
The IRS only notes two reasons on its website for why a taxpayer may be audited:
- Random selection – A statistical formula may flag a return that seems different than similar returns based on previous audits.
- Related examinations – A return may be audited when it is associated with issues or transactions with other taxpayers, such as a business partner or investor.
There are some factors that may make a tax return more likely to trigger an audit, including:
- Reporting an incorrect amount of taxable income – The IRS can compare the information a taxpayer provides on their tax return with the information shared by their employer and clients who provide 1099s to the taxpayer. Having inaccurate income information on your tax return can flag the need for an audit.
- Depositing or spending large sums of cash – Transactions of $10,000 or more must generally be reported to the IRS. Therefore, if you spent or deposited transactions of this dollar amount, you could be heading toward an IRS tax audit.
- Taking a home office deduction – Many people claim a home office deduction without understanding the rules related to this deduction. The IRS does allow you to claim a deduction for a designated space of your home as an office, but you cannot use this area for any other purpose.
- Receiving self-employment income – Individuals who are self-employed may receive several small clients and receive several 1099 forms. Gig economy workers may be flagged if they are believed to not have reported any income or less income than they received.
- Using your vehicle for business – While you may be able to take deductions for using your vehicle for business, it can be difficult to separate out relevant costs when you also use the vehicle for personal reasons. You can possibly avoid being subject to an IRS tax audit by keeping detailed records.
- Claiming too many deductions – While claiming deductions can help lessen your tax bill or increase the amount of your refund, claiming too many deductions can signal that something is wrong to the IRS. The IRS can estimate average amounts of deductions taken, and a return that deviates significantly from these amounts can be automatically flagged by the IRS computer system.
- Using duplicate information – The IRS uses software that detects duplicate information shared across multiple tax returns. For example, if you and someone else claim the same dependent, this anomaly could trigger an audit.
- Having international assets – Nothing quite so serves as a red flag as an offshore bank account. Taxpayers who do not report income from offshore accounts or other international assets may find themselves on the receiving end of an audit notice.
- Claiming rental income – Because there are limits on the number of losses you can claim, those with rental income and other income may be flagged for an audit.
- Making errors – One of the most common reasons for audits is taxpayer errors. Common examples include stating the wrong income, using the wrong tax filing status, improperly claiming deductions or credits, or not providing required information. Additionally, simple computational errors could cause a need for an audit.
- Rounding numeric figures – The IRS is very precise. Therefore, if you round figures so that they equal whole numbers, this can trigger an IRS tax audit.
- Running an unsuccessful business – Reporting a loss in more than three of the past five years can result in an IRS tax audit.
Common types of IRS audit letters
There are several different types of IRS audit letters that taxpayers may receive, including:
- IRS correspondence letter – The IRS begins the audit process by sending a letter that explains that an audit is being conducted on your tax return. It states what information you must provide and gives a deadline for when you must submit the information.
- Notice of audit meeting – This letter gives the time and place of an in-person audit.
- IRS Letter CP2000 – This type of letter explains how the IRS is recalculating the amount of tax owed based on the audited tax return.
What does an IRS audit letter look like?
Usually, IRS audit letters sent out through certified mail will be the real deal. The letter will contain the following information:
- A heading with the words “Internal Revenue Service”
- Your name, taxpayer ID, form number, and contact information
- A statement that a particular tax return you have filed has been selected for examination or audit
- Which portion of the tax return the IRS is reassessing
- The documentation you will need to provide in response to the notice
How to respond to an IRS audit letter
When responding to an IRS audit letter, you will need to properly identify yourself and include a copy of the audit letter. Provide the documentation that is specifically listed on the notice letter, along with any other evidence to support what you listed on your tax return. If an accountant or other third party prepared your tax return, request a copy of the return if you no longer have a copy.
Not responding to an IRS audit letter
While you might be afraid to respond to the IRS audit letter, there are consequences to not responding to an IRS letter. If you fail to provide a response within the 30-day time limit you are given, the IRS can disallow the items in debate on your tax return. Additionally, the IRS can sned you a tax bill and assess additional penalties and interest for the new calculated amount you owe.
Contact Damiens law for help with your IRS tax audit
If you have recently received an IRS tax audit letter, it is important to understand that you only have a limited amount of time to respond. For help with your response, consider contacting Damiens Law at our Mississippi office by calling (601) 957-9672 or our Tennessee office by calling (901) 499-4466. Our team can help prepare a response on your behalf and give you advice to help avoid similar problems in the future.