You have finally completed your tax return and just when you forget about it, you receive a letter from the Internal Revenue Service informing you you are audited.
Not all audits require you to pay more money to the IRS. Nevertheless, you may panic if you receive a letter. Will you have to pay a big fine? What does the IRS know about you that you don’t?
Chances are you haven’t done anything wrong knowingly. And despite the IRS’ reputation, the agency knows people make mistakes and doesn’t try to punish pure human error, says Erin Collins, National Taxpayer Advocate to the Taxpayer Advocate Service division of the IRS.
They also know that people don’t like to pay taxes and in some cases deliberately avoid paying what they owe. This is the main reason the IRS audits individual and business tax returns, Collins said.
Definition of tax audit
A tax audit is when the IRS wants to take a closer look at your return to make sure you’re paying the exact amount you owe. Therefore, you may need to share additional information such as receipts to prove you qualify for a credit or deduction you claimed on your return.
Where do IRS audit letters come from?
The IRS will always contact you by sending you a letter in the mail. He will never notify you of an audit by calling or emailing you. If you are contacted this way initially it’s probably scam. This letter will contain all the information you need to know about your audit and when you need to take action.
Most audits then continue to be conducted by mail, but a small percentage of audits require you to contact an IRS agent in person or by telephone to correct your statement.
Where do IRS audit letters come from?
Here is a sample of a letter the IRS might send to a taxpayer to let them know they are being audited. The letter will contain all the information you need to know about your audit as well as when you need to take action.
It is important to ensure that all of your personal information such as your social security number, address and contact information is correct.
If you haven’t already done so, you can create an online account with the IRS where you can see digital copies of the notices you have received.
For how many years can you be audited?
An audit the IRS performs on you may include returns filed within the last three years, according to the IRS.
“If we identify a substantial error, we can add additional years. We generally do not go back beyond the last six years,” said a job on the agency’s website indicates. “The IRS tries to audit tax returns as soon as possible after they are filed. As a result, most audits will be on returns filed within the past two years.”
What to do if you are audited?
Your first course of action should be “to actually open the letter,” Collins said. Many people might be tempted to throw them away because they think it will be bad news, she added.
“The worst thing you can do as a taxpayer is ignore the correspondence.” You must respond as soon as possible, either in writing or by telephone. Typically, the letter you receive from the IRS will specify the number of days you have to respond. You can also request more time to respond.
Failure to respond may result in additional penalties and interest. You may also lose your ability to dispute charges that the IRS believes you owe. It could also make matters worse and lead to legal action.
“Once an audit has begun, it is imperative that you cooperate and develop a good relationship with the IRS auditor,” said Michael Steffany, senior tax attorney specializing in compliance matters at Withersworldwide. “Far too often, taxpayers adopt an aggressive posture that leads to audits spiraling very far from their starting point.”
“Also, whenever possible, try to understand what the IRS is really questioning and answer those questions in a specific and thoughtful way,” he added.
Elisabeth Buchwald is personal finance and markets correspondent for USA TODAY. You can FFollow her on Twitter @BuchElisabeth and sign up for our Daily Money newsletter here