IRS Tax Audits

IRS tax audits panic millions of taxpayers every year. Even though the IRS has seen drastic budget cuts since 2009, their enforcement department, responsible for IRS tax audits, has had their budget increased. Enforcement and collection efforts have gone up by more than 11% in the past two years.

What is an IRS Tax Audit?

An IRS tax audit is a review of an individual or company’s accounts and financial information compared to what they claimed on their tax return.  The process is meant to ensure that all taxpayers are filing correctly and accurately each year.  IRS enforcement (collections, audits etc.) recovered $55 billion from taxpayers in 2011.

How does the IRS decide who to audit?

In recent years IRS enforcement efforts have been geared towards individuals who earn over $200k a year and corporations that make over $10 million.  If you fit into either of these income brackets your chances of being audited increase. Last year the IRS audited 1.11% of individual tax returns for income earners under $200K.  They audited 4% of individual returns for earners over $200K and they audited 12.5% of corporations who earn over $10 million. Still the IRS audited 1.6 million taxpayers last year who made less than $200K.  There is a chance that any taxpayer will be audited by the IRS. In fact, the IRS says that random selection based on a statistical formula is one of the ways they decide which taxpayers to audit. The IRS will audit you if there are discrepancies or mismatched information on any of your tax document and you have failed to correct them through the AUR department. (see below) Also, you may be audited if you had any transactions or business relations with another taxpayer who is being audited.

What is the IRS audit process?

Returns that seem to be incomplete, inaccurate or questionable are first sent to a department of the IRS called Automated Underreporting, the AUR department.  AUR will send you a notice letter that may be confused as an audit notice and vice versa. The notice sent when you are being audited says that your return has been “opened for examination.” A letter from AUR will have an AUR control number at the top of the notice and may have “CP2000” at the bottom right-hand corner. AUR may request additional information and will contain an explanation of necessary steps to take. There will be a summary of the IRS’s proposed changes or amendments to your return which will most likely result in a balance due to the IRS. A return can be opened for examination, or audit, for up to three years from the date it was assessed (or the file date.)  Accordingly you have three years to dispute the proposed charges or file for an amendment.  After three years, the current balance due on the return is now set and the IRS can take collection action for this amount for ten years; essentially 13 years from the original file date of the return.

The IRS audit process can be very confusing.

National Taxpayer Advocate Nina Olsen told CNN Money that many times taxpayers do not even know that they are being audited.

Correspondence for audits that will be processed by ‘mail only’ is a recent development for the IRS.  According to Olsen the use of audits by mail will only be more prevalent in years to come due to continuing budget cuts. The audit letter does not explicitly inform you that you are being “audited.” The reason your file is ‘opened for examination’ determines the content of the notice.  The only sure way to tell that you are in fact being audited is if you see the term ‘open for examination’ on the notice.  Otherwise you may believe that the IRS determined you owe them more money and there is nothing you can do about it. This is not true if you act quickly and communicate regularly with the IRS. You still have options until, as stated above, three years after the file of your return. A recent survey of 754 taxpayers who were selected for an audit found that a quarter of them didn’t even realize that they were being audited.  Almost half of the selection said they didn’t know what the IRS expected them to provide.

How can OMG Tax help me if I am audited?

IRS AuditIRS Tax Audits are not confusing for our Enrolled Agents who are dually authorized by the IRS to represent taxpayers and are required to complete continuing education courses to keep up to date on each year’s tax code.

Our tax professionals know what the IRS expects and how to satisfy the demands of your open examination. They are not confused by complicated terminology and vague instructions. 

Many times when dealing with the IRS taxpayers need an interpreter. They are hard pressed to get any clarity from an IRS representative who is overwhelmed with inbound calls from frustrated taxpayers who have been on hold for an average of 20-45 minutes, sometimes longer.

At OMG Tax we pride ourselves in keeping open communication with our clients and we focus our energy on customer service.  Having a tax professional on your team can mean a world of difference especially when it comes to tax audits.

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