An IRS audit letter can be a scary letter to receive. IRS audits may conger up all sorts of bad thoughts. IRS audits may bring up feelings of dread knowing an IRS auditor will be evaluating records and, ultimately, the taxpayer and his dealings. IRS audits may lead to worries about having to set aside time for the audit process or about having to pay additional monies to the government. In most cases, these fears are not justified. This article provides some tips to help keep the IRS audit an educational experience rather than a tax paying experience.

IRS Audit Overview

IRS auditors focus on the income tax return the taxpayer filed and any other financial information they may have. The other financial information usually consists of items reported to the IRS by third parties, such as Forms W-2 for wages, 1099 for other income, etc. This other financial information may also include publicly available information, such as local or state government records, or information provided by IRS informants.

Having reviewed this information, the IRS auditor will want to meet with the taxpayer to discuss any questions the auditor may have. These meetings are usually held at your home or at the local IRS office – depending on what is most convenient for the taxpayer. The IRS auditor may also issue a request for additional documents before, during, or after these meetings.

Once the auditor is satisfied he has a complete picture of the taxpayers financial situation, he will issue a report setting out any changes he is proposing or issue a “no change” letter. If the IRS auditor issues a report proposing changes, he will ask the taxpayer to agree to the change or to file a protest with the IRS appeals office to contest the change. If there are no changes, the IRS “no change” letter issued by the auditor simply acknowledges the IRS acceptance of the income tax return as filed by the taxpayer.

Common IRS Income Tax Audit Issues

There are several issues that are reviewed in most IRS audits. These issues involve unreported income and expenses, deductions, and credits claimed by the taxpayer.

The IRS takes unreported income very seriously. Taxpayers are well advised to obtain bank and brokerage statements for the year under examination from their banks early on in the IRS audit process. Not only will the IRS auditor probably request these documents, the additional time will allow the taxpayer to review them in detail providing them to the IRS.

The taxpayer should go through these statements and circle any deposits and add up the total. If this amount does not add up to the income listed on the taxpayer’s income tax return, the taxpayer should be prepared to explain why. Valid reasons might include transfers between accounts or the receipt of monies that are not subject to income tax (such as gifts, rebates or refunds, etc.).

IRS auditors also look for discrepancies in expenses, deductions, and credits claimed by the taxpayer on his tax return. IRS auditors generally do not focus on helping taxpayers find additional expenses, deductions, or credits that he is entitled to claim but which he did not claim. Independent of the audit, the taxpayer should take the time to note any of these additional expenses, deductions, or credits as he can report them to the IRS auditor and the IRS auditor can make the adjustment in the taxpayer’s favor.

With regard to the expenses, deductions, and credits claimed by the taxpayer, the taxpayer should be prepared to show documentary evidence to support each of these items claimed. This may consist of any number of documents, including cashed checks, legal agreements, etc.

IRS auditors often focus on easier adjustments, such as travel and business meal and entertainment expenses. Travel expense records may include a mileage log created at the time the miles were driven and a brief statement as to the business nature of each trip. Meal and entertainment expense records may include statements as to the business nature of each expense and the necessity or reasonableness for the expense. Many taxpayers fail to keep full records of these expenses. Thus, IRS auditors will usually be able to reduce these expenses by estimating a lower amount for the taxpayer.

Conclusion

The IRS audit process need not be feared. Indeed, the IRS audit process can prove to be a means of learning how to keep books and records. IRS auditors are public servants and many IRS auditors do view their role, in part, as one of educating the public about recordkeeping requirements.