Understanding an IRS Civil Tax Audit

Have you been selected for an IRS civil tax audit or wonder if you will be? Understanding the basics of a civil tax audit helps you respond effectively to the IRS if the time comes.

The Internal Revenue Service (IRS) notifies taxpayers selected for an audit through the mail. IRS audits are not initiated through email or over the phone.

As you read the letter from the IRS, you might be thinking, “Why me?” There are a lot of ways you can end up in the audit pile, including luck of the draw by a computer algorithm. Beyond random bad luck, there are quite a few reasons you could have been selected including:

• If you are involved with other taxpayers and businesses who have been or are being audited, your chances of audit increase.
• If you take a lot of deductions, take advantage of tax credits, claim significant business losses or swings in income, you move up the list.
• If you take strange deductions, deal frequently with crypto but do not report it, or if you have undisclosed or underreported income, your chances are good for being audited. A delay in payment of employment taxes can attract the attention of the IRS as well.
• Prone to math errors? Have someone else check your math on reports and returns, otherwise, your chances for an audit just went up.

You could be audited via correspondence (you mail documents back and forth) or through an in-person interview. The letter that you receive from the IRS provides instructions on the process and documents needed. While the IRS may accept some electronic records, be prepared to mail, or bring copies to your audit meeting. Because the IRS expects that you keep copies of all documents that support your tax returns, the IRS does not expect you to create anything new for your audit.  Just organize and produce everything requested. Do not send originals and if you mail anything, pay the extra couple of dollars for tracked delivery of your records to the IRS.

As the review progresses, and more documents are exchanged, you may begin to wonder how long this takes. While the review period for civil tax audits can be as short as four to six months, they can also string out for years, depending on the complexity of the situation and whether the IRS is receiving the information it is requesting.

Unless the IRS is simply inquiring about one section of your tax return, it is a good idea to speak with an experienced tax lawyer when you know what documents the IRS would like to review. While you may think nothing of the collection of statements you have been asked to provide, an attorney experienced with IRS audits may have an opinion on where the audit might be going. If you have a lot to lose, talking with a tax attorney is the first thing you should do when you receive your audit letter.

Good legal representation can help you avoid incriminating yourself and simplify the audit process for the IRS. If you have concerns about questionable tax activities—tell your tax lawyer at the outset. In the worst case, your attorney may be able to prevent your civil tax audit from being converted to a criminal tax investigation.

The audit will conclude with either no recommended changes to your return or additional assessments with which you may agree or disagree. If you disagree, you are free to appeal the finding or choose mediation to resolve the issue.

In 2022, IRS field audits resulted in additional tax and assessments of $21.9B. Correspondence audits added $8.3B to that figure. Understanding the audit process is important to responding to the IRS in a clear and organized way—which can shorten the process and reduce your chances of additional taxes.

Receive an audit letter? Speak with our tax attorneys about an IRS audit or criminal tax charge

Serving local and international clients, the legal group at Robert J. Fedor, Esq., LLC delivers experienced representation to individuals and businesses regarding compliance issues, tax litigation, and offshore tax concerns. Call 800-579-0997 or contact us online today.