Nobody wants a letter from the IRS. Some of us will go to great lengths to avoid an audit – and maybe even ignore one that’s already started.
But does that work? In a way – but probably not in the way you’re hoping.
If your audit is like most audits, it’s not random
The IRS strategically picks returns to audit. So, if your return was a high enough priority for the IRS to select for audit, you’ll want to know what that means and what your options are.
Here’s what happens in each of the three types of audits on Form 1040 returns – and what your next steps should be.
1. How to respond to a mail audit – and what happens if you ignore it
The IRS does most audits by mail. Mail audits (also called correspondence audits) typically focus on a few items on your return. The IRS wants you to provide proof of those items.
Often, this is income you may have left off your return, or income that doesn’t match other information the IRS has about you.
The IRS will give you a deadline (often 30 days) to respond with documentation, or proof, of your position on your return. You can ignore it, or you can respond.
Here’s what happens if you ignore the notice:
- The IRS will make changes to your return (like adding income or removing deductions and/or credits).
- The IRS will propose taxes and possibly penalties, and you’ll get a “90-day letter” (also known as a statutory notice of deficiency).
- You’ll have 90 days to file a petition with the U.S. Tax Court.
- If you still don’t do anything, the IRS will end the audit and start collecting the taxes you owe. You’ll also waive your appeal rights within the IRS.
Here’s what you should do:
- Gather and organize all the documents that the IRS is asking for, plus a clear summary, and send them to the IRS by the due date.
- If you’re missing documents or you want help responding, a tax pro can organize your response and contact the IRS for you.
2. How to respond to an office audit – and what happens if you ignore it
Office audits are usually more extensive than mail audits because office audits involve more parts of your tax return.
The stakes are also higher. The IRS agent will often want a face-to-face meeting, so most people in this situation get a tax pro to represent them and deal with the IRS.
Again, you can ignore this issue, or respond.
Here’s what happens if you ignore an office audit:
You’re not doing yourself any favors if you don’t show up for an appointment with the IRS. You may have avoided the meeting, but you’ll pay for it later in taxes, penalties, and interest. The IRS will change your return, send a 90-day letter, and eventually start collecting on your tax bill. You’ll also waive your appeal rights within the IRS.
Here’s what you should do:
It’s a good idea to engage a qualified tax pro well ahead of your audit appointment with the IRS. Your tax pro can represent you, meaning he or she can deal with the IRS for you. A tax pro will also tell you what to provide and how to present it. You may not even have to attend the appointment.
Whether it’s you and/or your tax pro at the meeting, you should give clear, complete, and truthful answers to the auditor’s questions.
3. How to respond to a field audit – and what happens if you ignore it
Field audits are the most serious type of audit. They usually target high-wealth individuals and/or businesses. And they’re less like an audit of your tax return and more like an audit of you.
In other words, the IRS revenue agent is going to look into your life to try to see if you reported everything you should have on your return. For example, the agent will likely look at your bank statements and ask you to explain certain deposits or discrepancies.
In a field audit, the IRS revenue agent will visit your business and/or home. But a good representative can often deal with the IRS directly and limit your contact with the IRS.
IRS revenue agents don’t easily give up on locating and contacting taxpayers for field audits. So ignoring a field audit isn’t really practical, but here’s what would happen if you did.
If you ignore a field audit:
The revenue agent is going to change everything the IRS was questioning on your return. The IRS will basically reconstruct your income situation based on the information it has. That will mean more taxable income, and more taxes that the IRS will collect.
Once the revenue agent has changed your return, the IRS will send a 90-day letter and then start collecting the tax. Again, you’ll waive your appeal rights – and you aren’t likely to get them back.
Here’s what you should do:
Field audits can be complex and often involve interpreting tax law and procedure. The average taxpayer requires a tax pro to get the best result in the least amount of time. Your tax pro can:
- Represent you with a power of attorney
- Guide you through the audit
- Meet with the IRS
- Handle contacts with the IRS revenue agent
Understanding how audits work is critical to getting the best outcome – including minimizing penalties — and reducing the time it takes the IRS to audit you.
For any audit, it’s best to be proactive and follow these basic principles
- Use your right to representation, especially in office and field audits. Tax professionals know your rights and can protect them.
- Follow your tax pro’s advice. He or she should handle most or all contacts with the IRS.
- Prepare complete, clear, truthful responses by the deadline.
- Keep the IRS in loop. You or your representative should let the IRS know if you can’t keep an appointment or need to extend a deadline.