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Basic Advice on Tax Audits

The word audit brings with it a slew of scary thoughts: incarceration for multiple years or penalties that reduce you to poverty are a few that might cross your mind.

However, this is rarely the case. Many audits happen as a result of simple tax mistakes, and can be resolved quickly and easily.

This page:

  • Describes the three types of audits

  • Lists "tip-off" items that may trigger a tax audit

The next two pages:

  • List and describe various IRS audit notices

  • Offer advice on what to do if you get audited

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Three types of tax audits

An audit is an investigation conducted by the IRS to verify the information you provided on your tax return.

There are three types of audits:

  • An office audit, which is conducted in the IRS agent's office.
  • A field audit, which is conducted on the business premise.
  • A correspondence audit, which is conducted by mail.

For an office audit, you will be notified by mail. The notice will inform you of the date of the audit and which items are to be reviewed at that time.

Before the date of your audit, collect any information and documents that prove the items the IRS are contending are authentic. If you need additional time to secure the necessary documents, you can request a postponement.

Most office audits cover:

  • employee business expenses,
  • itemized deductions,
  • charitable contributions,
  • moving expense deductions, and
  • income from tips,
  • rental property, and
  • capital gains.

Although there is no way to guarantee yourself absolute safety from a tax audit, you can drastically reduce the likelihood that you'll be audited by filing your return online and having TurboTax double-check it for errors.

Field and correspondence audits

Businesses are the primary target of field audits, although complex individual audits are often the focus too. Prior to a field audit, the IRS agent is not required to inform you of the reason for the audit. Be prepared to verify all your income and expenses with indisputable proof.

Correspondence audits deal with:

  • itemized deductions,
  • small casualty and theft losses,
  • small business expenses,
  • family credits,
  • retirement plan payments, and
  • some income items.

You should reply to the IRS's request for evidence to support a deduction, credit, or expense by sending them copies of documents of proof, such as canceled checks, bills, and statements.

Although audits are intimidating, don't fold under the pressure or try to avoid the hassle of dealing with one.

You should never ignore IRS audit notices. Instead, respond to them in a timely manner.

If you believe the IRS has made an error in judgment and you have enough written material to prove your case, you should file an appeal. Come prepared but don't become irate.

Audit Tip Offs

The IRS usually target people with what they consider to be suspicious items on a tax return. A few of these "tip-offs" are listed below:

  • Unusually large itemized deductions
  • A home-office deduction
  • Claiming large amounts for travel and entertainment expenses
  • Large losses in a business for many consecutive years
  • Large casualty-loss deductions
  • Incorrect or inaccurate information from official documents
  • Filing an estate-tax return

Next: the types of tax audit notices and what to do when you get one.

Related IRS Publications

You can get more information about responding to an audit directly from the IRS, in the form of Publication 556.

For more information on your rights as a taxpayer, consult Publication 1.

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