Getting news from the IRS that you’ve been selected for an audit can be extremely worrisome and overwhelming, even if you believe that you haven’t done anything wrong. When getting a notice from the IRS regarding an audit it is most likely not for a return that you’ve just filed. Generally the IRS has three years from the date you filed your original return or two years from the date you paid the tax, whichever is later, to conduct an audit. Gurian CPA understands how stressful it can be when facing an audit from the IRS and has provided some steps on how to survive an audit if you were one of the lucky chosen ones!
How an audit starts
You will first here about an audit by receiving a letter from the IRS. The written notice from the IRS will identify the items on your return that are in question, such as employee business expenses or individual casualty losses, and an outline of the types of records that you’ll need to provide to help resolve the audit.
Types of audits
There are four different types of audits that the IRS conducts. Knowing which type of audit that’s being conducted can help you better prepare yourself to resolve it.
The simplest form of an audit is a correspondence audit. A correspondence audit only requires you to mail in the records needed to verify a specified claim on your return. For instance, the IRS may have questions on charitable donations which would trigger a correspondence audit. If it’s a small claim and not a lot of income is involved, the audit is typically done through the mail. As long as you have the data to back up any claims on your return, a correspondence audit is typically something that you can handle on your own. If you are having trouble obtaining the proof needed to resolve the audit, it is advised that you contact your local CPA to help you resolve the matter.
The second type of audit conducted by the IRS is a random audit. With a random audit the IRS isn’t looking for anything in particular when they send out a random tax payer to review their return. During a random audit your entire tax return will be reviews. Unless you have questionable information on your tax return, this is generally an audit that you can resolve on your own.
The third type of audit that the IRS conducts is an office audit. If the IRS has more questions about your return that goes beyond you being able to simply mail in the required information, you’ll receive a letter in the mail inviting you into the IRS office for the audit. This type of audit is more serious than a correspondence audit, so it is advised that you contact your local CPA to attend the in-office audit with you. An office audit can typically be completed the same day. If more information is still required after your in-office audit, you’ll still have time to provide the missing information to the IRS.
The fourth type of audit conducted by the IRS is a field audit. A field audit is the most severe type of audit and involves the IRS coming to visit you at your home or office. With this type of audit, the IRS doesn’t want to limit audit to particular items and can last anywhere from one day to a week, depending on the size of the taxpayer’s business. During a field audit the IRS will interview employees about key business operations, including processes, accounting procedures, management structure and internal controls. At the time of the audit it is very important to make sure that you are represented by your local CPA that filed your tax returns.
What records do you need to keep?
The IRS recommends keeping any documents that support your income you’re reporting or any deduction or credit you’re claiming until the time limit for the IRS to take any action for a tax return has expired.
- Proof of income, including W-2s and 1099, bank and brokerage statements, K-1 forms and spousal-support payment codes
- General financial records, like bills and invoices, credit card statements, mileage logs, cancelled checks and other proof of payment deemed necessary to support deductions and credits you claim.
- Financial records related to real property, including paperwork from the purchase or sale of a home as well as all documents associated with the costs of buying, selling or managing rental properties
- Investment records, including those related to stock transactions. IRAs and other retirement accounts
How long should you keep records?
The IRS recommends you keep tax records for three years after filing for most situations. This is the recommended time because that’s the amount of time you have to amend your return to claim additional eligible credits or refunds, as well as the typical amount of time the IRS has to audit you to try to collect any additional taxes owed. There are certain situations that the IRS advises you should keep your records longer than the general three years.
- Seven years if you file a loss claim from worthless securities or reduction of bad debt
- Six years if you fail to report income that you should have, but only if that income was more than 25% of the gross income you reported on your return
- Four years for employment tax records
- Forever if you don’t file a return
- Forever if you file a fraudulent return
Knowing the type of audit being conducted and staying organized with your tax documents can help you survive your audit quickly and efficiently. It’s important to remember to act on the audit immediately and not put it off. If you ever have any questions or concerns during the process of your audit make sure to contact your local CPA for guidance to resolve the audit quickly and efficiently. After you’ve experience an audit, you’ll never want to go through one again. There is no way to 100 percent avoid an audit, but there are steps that you can take to lessen your chances of being selected. Make sure to learn and take our steps on How to Avoid an Audit!
By: Paige Knight