In actuality, the chance of most people getting audited is fairly slim. Many tax professionals are reporting that fewer of their clients have received notices this year than ever before. If you are one of the unlucky few chosen to get up and personal with the IRS, do not panic! There is a chance that you are one of the 10,000 taxpayers who have been chosen at random to be audited in order to help the IRS identify common trouble spots and areas of mistake on tax forms. Audits may also be generated when a business that has sent in tax information on you or the IRS makes a mistake regarding your tax return. On the downside, you are statistically more likely to wind up owing the IRS additional taxes after your audit. Only 12% of people audited walk away unscathed with their returns intact.
There are three types of audits that you may be subjected to, field audits, office audits and correspondence audits. Field audits focus predominantly on business returns and are held at the taxpayer's place of business. Filer's of a 1040 Schedule C are the usual victims of this type of audit. Be prepared to have to verify travel and entertaining expenses, gifts, total income, automobile expenses, even the source of every deposit into your bank account! Field agents have a great deal of freedom in what items they choose and how deeply they examine them. If it is revealed in your audit that you are indebt of additional taxes to the IRS, expect to have your subsequent year's returns audited next.
An office audit is held at IRS headquarters. You will receive a number 904 notice informing you of the date of the audit as well as the items they are interested in reviewing. If you cannot make this date, don't fret. You are entitled to two postponements. Office audits greatest concerns are usually itemized deductions, such as medical expenses, charitable contributions and deductions for personal exemptions. If the auditor establishes that there is a probability that you didn't report all income, you will receive a Form 4822 Statement of Annual Estimated Personal and Family Expenses. The purpose of this form is to acquaint the IRS with your lifestyle and all of your expenses. It's a lot easier for you to wind up owing additional taxes when agents examine your sources of income as opposed to your deductions. So be careful!
The final type of audit, a correspondence audit, takes place completely by mail. The least stressful of all audits discussed, you cannot be caught off guard by probing questions and inquiries. In addition, these audits are usually limited to a few key areas of your tax return. As long as you cooperate fully with the IRS in providing details of your claims, you can request to have your audit conducting in this manner. If you feel that your explanations are too complicated or require detailed explanation, you may request a meeting with an IRS auditor in person.
Here are a few helpful tips to follow when time of your audit arrives.