Getting audited by the Internal Revenue Service (IRS) is stressful. Most individuals and organizations fill out their tax returns as honestly and accurately as possible, so they feel surprised and worried when the IRS selects them for audit. Keeping your documents in order is vital—the IRS will impose tax penalties if they consider your return as inaccurate or fraudulent.
To avoid penalties after your audit, contact a California Tax Attorney. A qualified tax professional will help you understand your rights and prevent or reduce financial penalties.
What Happens During an Audit?
The IRS uses audits to review the tax returns of individuals or organizations. If your return is selected for audit, it doesn't mean there's a problem. The IRS has various methods for choosing returns for audit, including random selection. They run a statistical formula, which compares taxpayers' returns against other, similar returns, looking for anything out of the ordinary. The IRS also sometimes chooses your return if you've had transactions with other individuals or businesses who are already being audited.
Once the IRS selects you for audit, they will notify you via mail. They'll conduct the audit process either by mail or in-person interview. For either method, you'll have to provide documents requested by the IRS.
Typical documents requested by the IRS during an audit:
- Receipts
- Bills
- Legal papers
- Canceled checks
- Loan agreements
- Travel logs or diaries
- Tickets
- Medical and dental records
- Theft or loss of documents
- Employment documents
- Schedule K-1
If your audit is by mail, you may have to fill out a questionnaire in addition to sending your documents. The IRS recommends that taxpayers keep their tax and financial records for at least three years after filing their returns. For most situations, the IRS can only go back as far as three years to select a return for audit.
You Have Rights in an IRS Tax Audit
During an IRS tax audit, you have certain rights as a taxpayer. The IRS Taxpayer Bill of Rights grants you the following:
- The right to a clear explanation from the IRS concerning your tax forms, instructions, publications, notices, and correspondence
- The right to prompt, courteous, and professional service from all IRS employees
- The right to pay the exact amount of tax you owe
- The right to contest IRS decisions and have a fair and impartial administrative appeal
- The right know deadlines—how much time you have to appeal, to pay a tax, when an audit concludes, etc.
- The right to privacy and due process
- The right to the confidentiality of all information you provide to the IRS
- The right to authorize a tax professional (such as an accountant or tax attorney) to represent you to the IRS
- The right to a fair and just tax system
The right to representation is one of the most important rights you have as a taxpayer. Hiring a tax attorney to handle your audit or appeals process with the IRS will ensure you don't make costly mistakes. Letting a professional deal with your taxes also poses a smaller disruption to your daily life. As soon as you receive notice of an IRS audit or investigation, call an experienced California tax attorney.
What Is the Outcome of an Audit?
Once the IRS finishes the audit, they will either propose changes to your tax return or no change at all. If the IRS proposes changes, you can agree and accept the modifications to your tax return. If you agree, you could either receive a tax refund from the IRS or pay a greater tax debt.
If you disagree with the IRS's proposed changes, you can file an appeal. In some cases, you may be able to request an audit reconsideration as well. Reconsideration usually only applies if you procured relevant documents after submitting your audit paperwork, however.
IRS Tax Audit Penalties
The IRS imposes several types of penalties on taxpayers for various reasons. The agency calculates penalties based on lack of accuracy in tax returns and for fraudulent returns.
Accuracy
The IRS can impose penalties if your tax return is inaccurate. If the inaccuracy results in an underpayment, the penalty could be 20% of the underpaid amount.
Which inaccuracies on tax returns does the IRS penalize?
- Failure to make a reasonable attempt to comply with the rules and regulations, or careless, reckless, or intentional disregard for rules and regulations
- Stating income tax as either 10% less or $5000 less than what is actually owed
- Substantial valuation misstatement under chapter 1
- Stating pension liabilities as 200% more than what they're worth
- Understating the value of an estate or gift tax by 65% or less
- Disallowance of claimed tax benefits because of a transaction lacking economic substance or failing to meet the requirements of any similar rule of law
- Undisclosed foreign financial asset understatement
- Inconsistent estate basis
Fraud
If the IRS finds that you underpaid your taxes because you submitted a fraudulent return, the penalty is severe. You could pay up to 75% of the amount that was underpaid.
For most audit cases, the IRS can go back three years. However, if the IRS has reason to believe you committed tax fraud, the agency has no limit on how far back they can go.
Tax Audit Penalties in California
The Franchise Tax Board (FTB) in California imposes penalties and fees on state taxpayers as well.
The most common tax penalties for California residents:
- When you file a late return or don't file at all
- When you pay your taxes late or don't pay at all
- When you underpay
- When your paycheck doesn't withhold enough taxes
- When you don't pay electronically if it's required
- When you make a dishonored payment (insufficient funds, bounced check)
Professional Help with Your Tax Audit Penalties
Nobody likes audits—but paying audit penalties is even more unpleasant. An experienced tax attorney can help you complete the audit process correctly, avoiding penalties and fees where possible. Contact a California Tax Attorney today to set up an initial consultation.