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Audit

An audit is an IRS inspection of a person's or entity's books and records. If you're audited, the IRS will send a letter telling you which type of tax audit applies to you.

The three types of tax audits are:

  • Correspondence audit -- You don't need to meet with an IRS agent face-to-face. The IRS will request documentation, and you can mail it instead of delivering it in person. This is the most common type of audit.
  • Field audit -- An IRS agent will come to your home or business to examine books and records. Field audits usually involve businesses.
  • Office audit -- You must go to an IRS office for an interview. You should take documentation that supports items the IRS is questioning.

Preparing for an IRS audit

It’s best to cooperate with IRS requests for information within the requested amount of time.

If you're asked to appear before the IRS, take these items for the tax year in question:

  • Your return
  • All supporting documentation
  • Other relevant items requested in your IRS letter

However, don't let the auditor keep any of your originals. Make copies of everything to leave with the auditor.

Audit terms to know

Lien -- This is a legal claim to your property as security for payment of tax debt. It’s not a seizure. However, the IRS can seize your property if you fail to pay the debt. If the IRS files a Notice of Federal Tax Lien, it publicly notifies all your creditors.

The IRS might issue a lien if all of these occur:

  • The IRS assesses your outstanding tax liability.
  • The IRS sends you a Notice and Demand for Payment. This is a bill telling you how much you owe in taxes.
  • You neglect or refuse to pay the entire debt within 10 days after you’re notified.

The IRS will send you a Release of the Notice of Federal Tax Lien within 30 days after you do either of these:

  • Pay the tax due
  • Make arrangements for payment within the allotted 10 days

Levy -- A levy is a legal seizure of your property to pay a tax debt. The IRS can seize and sell any type of real or personal property you own or have interest in, including:

  • Cars
  • Boats
  • Houses
  • Wages
  • Retirement accounts
  • Dividends
  • Bank accounts
  • Rental income
  • Cash value of life insurance
  • Commissions

The IRS won’t seize your property until you've received and ignored both of these:

  • Final Notice of Intent to Levy
  • Notice of Your Right to a Hearing

These documents are delivered via one of these ways:

  • In person
  • To your place of business by certified mail
  • To your last known address by certified mail

Records to keep in case of an IRS audit

You should keep your returns and supporting documentation for seven years.

Supporting documentation includes:

  • Home-mortgage statements
  • Forms W-2 and W-2G
  • Forms in the 1098 and 1099 series (Ex: 1099-DIV)
  • K-1 schedules
  • Receipts for employee business expenses
  • Receipts for all charitable donations, including cash and noncash donations
  • Justification of fair market value (FMV) for any noncash items donated to charity (Ex: H&R Block's DeductionPro helps you find the value of items)
  • Receipts and other information for single noncash items donated to charity with value greater than $500
  • Receipts for rental property income
  • Brokerage statements
  • Receipts for qualified education costs
  • 401(k) statements
  • IRA contribution records
  • Receipts for items sold at a gain
  • Home-office-related receipts
  • Pay stubs
  • Copy of front and back of checks with which you paid your taxes due on your return

Returns likely to get audited

According to the IRS statistics, the IRS is more likely to examine these individual returns:

  • Returns with the Earned Income Credit (EIC) claimed
  • Returns with Schedule C
  • Returns with Schedule E
  • Returns with Form 2106

To help avoid an audit:

  • Report all of your income
  • Claim only the deductions and credits you’re entitled to

If you want to learn more, see these tax tips:

  • IRS Contact Information
  • Amended Return (Form 1040X)
  • Self-Employment Deductions
  • Earned Income Credit (EIC)

 

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