Audits are the way the U.S. Internal Revenue Service (IRS) double-checks your income tax return. If the IRS has reason to believe you didn't report all your income, or that you claimed credits or deductions for which you don't qualify, you can be audited. Although the audit process has a reputation for being complex and difficult, it is sometimes simple and easy. You can also be audited by your state income tax agency.
A Computer Prompts Audits
The IRS uses a computer program, called the Discriminant Information Function (DIF), to screen all tax returns. DIF checks tax returns for any unusual factors and to determine if claimed deductions are reasonable for a taxpayer in that income range. If your return includes a deduction that seems extreme, or if there's something else unusual about your return, DIF will flag it for review.
Flags Result in Review
When DIF flags a return, it goes to a human auditor for review. The auditor might notice another problem that has nothing to do with the reason the computer initially flagged the return. For example, DIF might have caught a charitable contribution deduction that didn't align with the taxpayer's income. When reviewing the return, the auditor might notice that the taxpayer calculated the earned income tax credit improperly. The agent has the option of approving the return or passing it on to a higher authority. If there's a serious problem or discrepancy, the taxpayer will probably receive an audit notice.
Some Audits Are Minor
In some cases, the entire audit process involves nothing more than mailing requested documentation to the IRS. More complex cases require meeting with the auditor, once or several times. The majority of audits are resolved when the taxpayer agrees to requested changes and makes necessary payments.
You Have Rights
If the IRS selects your return for an audit, you have certain rights. Tax law sets a statute of limitations for auditing your return. It must occur three years from the date you filed your return or from the date it was due, whichever occurred later. The auditor must begin and complete an examination by that time. If this doesn't happen, you can put a halt on the audit - but this doesn't mean the audit will go away. The auditor will still make a decision regarding what you owe. The decision will be based on the facts known at that time, without further investigation. This might not be to your advantage. You're also entitled to representation in an audit, either by a lawyer or a tax professional. If you feel that the auditor's final decision is wrong, you can appeal it, either to the IRS or to the court.
A Tax Lawyer Can Help
The law surrounding an IRS or state agency audit of your income tax return is complicated. Plus, the facts of each case are unique. This article provides a brief, general introduction to the topic. For more detailed, specific information, please contact a tax lawyer.