Although everyone dreads the prospect of a tax audit, they’re a rare occurrence. In 2018, the IRS audited an estimated 1 million returns, which is only 0.5% of all returns filed the year before. Situations that can trigger a tax audit include:
- Miscalculations on any of your personal or business tax return
- Claiming a high home office deduction
- High charitable donations
- An unusually high number of business expenses
There are four types of tax audits, each one varying in intensity and the amount of scrutiny applied to your case.
Correspondence audits account for nearly 75% of all tax investigations carried out by the IRS. You receive a 566 letter requesting more information about details on your tax return, such as charitable donations or home office expenses. They will ask to see receipts and other documentation that substantiates these deductions.
You have up to 30 days to respond: failure to do so may result in the credits or deductions being disallowed and additional tax, interest, and penalties being assessed. If you are missing any of the requested documentation and you could receive a large tax liability as a result, seek assistance from a tax attorney.
An office audit is the next step up on the investigation scale. It takes place at your local IRS office and is generally used to clarify issues that are too large or complicated to be resolved via correspondence. Issues with the following documentation can call for an office audit:
- Schedule A (itemized deductions)
- Schedule C (business profit/loss)
- Schedule E (rental income/expenses)
During the audit, an IRS examiner will ask you questions about the issue being investigated, but it’s not unusual for the questioning to branch into other areas, such as your job, lifestyle, and overall financial position.
These investigators are trained to look for evidence of unreported income, which will give the IRS grounds to expand the scope of the investigation. This is why you should speak to an IRS audit attorney beforehand and obtain professional representation for the audit.
Office audits rarely last for more than a day. In the end, you will receive a report that explains any proposed changes to your tax return. If you disagree with any of them, you have the right to file an appeal.
Field audits are the most serious and intrusive tax audits. The IRS agent will come to your home, accountant’s office, or place of business to interview you and examine your financial records. If your business is being audited, the agent will also talk to your employees about company processes, internal controls, accounting procedures, and more.
If you’ve been selected for a field audit, experienced legal representation is crucial, as anything you say can be used to deepen the investigation. A tax attorney can deal with the auditor on your behalf to protect your rights and ensure that you don’t unwittingly say something that causes further tax problems for you.
Taxpayer Compliance Measurement Program (TCMP) Audit
Although the Taxpayer Compliance Measurement Program (TCMP) audits have been halted until further notice, it can be reinstated at any time, and you should know what to expect.
In the past, the IRS used these audits to gather statistics that could help them in administering the tax laws. Taxpayers were chosen at random to go through their tax returns and substantiate every number to show that they were complying with applicable rules and regulations. IRS auditors also looked closely for signs that expenditures exceeded the income levels reported on the return. If any deficiencies were pinpointed, the taxpayer was subjected to additional taxes, interest, and penalties.
If TCMP audits are ever reinstated, obtain assistance from a tax attorney, as they are exacting and could lead to unexpected consequences if you are not prepared.
Speak with a New Jersey Tax Attorney
No matter which audit you are facing, Paladini Law can help. Attorney Brad Paladini has represented many clients undergoing arduous office or field audits and help them overcome challenges such as missing receipts or exaggerated expenses. If the IRS has only requested clarification of a minor issue but you know there are major problems with the return (e.g. underreported income or inflated deductions), we will work with you to resolve the issue and affordably address any tax deficiencies. To schedule a consultation, please call 201-381-4472 or complete our online form.