Expert Tips: How to Choose the Right Tax Audit Help
Being notified that you’ve been selected for a tax audit can be scary and confusing. It’s easy to assume that you are being audited because you did something wrong. Understanding how tax audits work and how you can prepare for one is the first step to unraveling the mystery and apprehension of getting an audit letter from the government. Knowing what to expect after you’ve received a tax audit letter is critical to choosing the right type of tax audit help. And having the right audit support can make all the difference in your audit experience.
Types of Tax Audits
Let’s start with the basic definition of an audit. A tax audit is a comprehensive review of your tax return and personal and financial information to make sure you are in compliance with tax laws and reporting a correct amount of tax. Tax audits can be conducted by either the federal government, which is administered by the IRS, or by your state, or even local government. In this article, we’ll be focusing primarily on IRS audits, although many of these tips can be used for state and local tax audits as well.
There are three general types of IRS audits. The first is what is known as a correspondence audit, where the communication between you and the government is done exclusively through mail. This is the most basic type of audit, and typically just requires you to send more information about certain items on your tax return. If your tax return is a bit more complex, you could be selected for an in-person interview to review your records. The interview may take place at your local IRS office, which is known as an office audit, or it may take place in your home, your place of business, or your accountant’s office in what is known as a field audit.
Office audits and field audits help to provide a more direct line of communication between you and the government auditor, and you can provide access to your financial information or the books and records of your business. If you have been selected for a correspondence audit but would like to meet face-to-face with an auditor, you can request that your audit be converted to an office audit or field audit. This can be helpful if you have a lot of financial records that may be too difficult to mail.
Selection and Notice
You may be wondering why you received a letter from the IRS in the first place. It is important to remember that being selected for an audit does not mean that there is something wrong with your tax return. There are several ways that a specific tax return can be selected for review. The IRS uses a random computer selection based on a formula to select a sample of returns to examine as part of their annual review process. So, it is possible that the selection of your return for audit was just the luck of the draw. Another way to be selected for an audit is having specific ‘red flag’ items on your return, such as vehicle expenses, meals and entertainment deductions, or large business losses. Making mathematical errors or having perfectly round numbers are also things that may get your return flagged for audit. Your tax audit could also be a result of a related person being audited. For example, if you are married but filing separately from your spouse, their return being selected for an audit could trigger your return also being selected, to make sure that both returns are in compliance with the laws regarding split income.
The first step in the audit process is receiving a letter in the mail notifying you of your selection. You will never receive a phone call or text from the IRS before receiving a letter, so don’t believe anyone who calls you claiming to be from the IRS if you haven’t received a letter from them. The IRS notice will let you know what type of audit you’ve been selected for. If it is a correspondence audit, the notice will include the mailing address where you should send your financial records. If it is one of the in-person type of audits, the notice will include the contact information of your auditor and a request to call and set up a time and place for an appointment.
The Audit Process
The notice you receive from the IRS will list the types of records that you are being asked to provide. Records include any type of documentation that can help support the numbers on your tax return. The IRS has access to most types of informational forms such as W-2s and 1099s, so you won’t likely receive a request to provide them, although it is a good idea to have copies available anyway. The types of records you are most likely to receive a request for include things like legal documents, receipts, bills, logbooks, bank account and credit card statements, and loan agreements. If you have a business that you report on your personal tax return (like on a Schedule C or Schedule E), you may receive a request to provide the books and records for that business.
Having organized and complete records can go a long way in making the audit process smoother. If your financial information is mixed with someone else’s, make sure to separate out what is yours and document how you made the division. Remember, the records being requested from you are being used to support what is on your tax return that has already been filed, so the records should already exist. If you do not have a specific document that you are being asked for, do not make up records. If you need time to access a specific document, be transparent and let your auditor know that you will need additional time to gather your records, and explain the circumstances behind it. The sooner you can provide your records to your auditor, the sooner you can move forward with the audit, so it’s important to have your financial records organized and completed before you even get selected for an audit.
Once you have provided your auditor with the requested records, you will be asked to participate in an interview. The interview may take place in an IRS office, your home, your place of business, or your accountant’s office. The choice of location is dependent on what the audit is focused on. If the audit is focused on business expenses you deducted on your Schedule C, for example, you may be required to have the interview at your place of business to allow the auditor to observe the operations of your business and verify that the deductions are accurate. If your accountant has an office, it could be a good idea to have the interview there, as a neutral third-party location may be more comfortable for both parties.
During the interview, the auditor will ask you questions about your personal life to gain a better understanding of your financial situation. Stay calm and answer questions honestly and fully, but don’t feel like you have to give more information than you are asked for. If you ever feel like you are not sure why a specific question is being asked, feel free to ask the auditor to clarify their question and purpose. Remember, at the end of the day, the goal of a tax audit is to verify that the amount of tax reported on your tax return is accurate, and all questions and requests for records should be to reach that goal.
At the conclusion of the audit, the tax auditor will issue a report with their findings. There are three potential conclusions to an audit: no change, agreed, or disagreed. If you provide substantial support for all the information on your tax return, the tax auditor will issue a no change report, and there is nothing more for you to do. If there are changes to your tax return, and you agree with the changes the auditor made, the conclusion is considered agreed. If you don’t agree with the changes the audit made, the conclusion is disagreed, and you may appeal the results of the audit. Appeals can make the audit process drag on, so make sure you understand the tax laws involved before filing an appeal.
You may be wondering, “Since I will be asked personal questions, does that mean I have to deal with a tax audit all by myself?” The answer is no! If you're facing a tax audit, you don't have to handle it on your own. Even if you feel like you have a good sense of your financial records and you can answer questions about your tax return, it is always more advisable to seek help from tax professionals who can assist you in navigating the audit process. Tax audit support can come in a few different ways: a tax professional such as an enrolled agent or a certified public accountant (CPA), or an attorney. There are many factors to consider when selecting the right tax audit help. Having the right support can be the difference between a smooth or difficult audit process and may even affect the outcome of the audit.
Expertise and Experience
One factor to consider when choosing tax audit representation is the expertise and experience of the tax professional. You want to work with someone who has both an in-depth understanding of tax laws and regulations and familiarity with representing taxpayers and communicating with the IRS. CPAs and enrolled agents are two types of tax professionals with extensive tax knowledge. The advantage that CPAs have is that they have both a wider and a deeper knowledge of tax laws and regulations. Because of this, CPAs are more likely to be very familiar with niche tax issues, such as depreciation or passive activity income. If you have complex tax items on your tax return, a CPA can help explain the intricate tax issues to both you and your auditor and ensure that you are in compliance with the tax laws and regulations.
A tax professional who has experience working with the IRS can offer valuable insights into the audit process. Choosing a tax professional with expertise in tax audits can save you time and money. Enrolled agents primarily represent people in front of the IRS, so they have a lot of experience in that. They can help you prepare your documents and know what to expect from the audit. Because they work so frequently in tax audits, they can quickly identify potential issues and help you avoid costly mistakes. Enrolled agents can also help you determine your rights as a taxpayer and ensure that your audit is being conducted in an appropriate manner.
If your audit is related to debatable tax positions, you may decide that a tax attorney provides the right type of expertise and experience. Tax attorneys have experience in defense and can help you present your documentation in the best light to support your tax return. They can help you minimize the amount of additional tax liability or penalties that may be assessed, and because they are familiar with the judicial process, they can help you appeal decisions and prevent you from being audited for the same thing over and over.
Deciding between a CPA, an enrolled agent, or a tax attorney requires you to know which area you need the most assistance with. Do you need someone who can explain complex tax issues and help apply the tax laws and regulations? Do you need someone who understands the audit process well and can help make sure the audit is being conducted properly? Or do you need someone who can help defend your tax positions and protect you from further litigation? The answers to these questions can help point you in the right direction towards appropriate audit help.
Communication and Availability
Good communication skills are crucial for tax audit support. Tax concepts are not always the easiest to understand, so you want to work with someone who can explain complex tax concepts in simple terms. They should be able to listen to your concerns and answer your questions. A tax professional who communicates effectively can help you understand the audit process and what to expect. They can also keep you updated on the progress of your audit. You don’t want to be waiting and wondering what the status of your audit is, and whether or not someone is working on your case.
But good communication skills extend beyond how well you are communicated with. A tax audit support professional should be able to converse professionally with your tax auditor and facilitate good communication between you and your auditor. Tax audits can be a stressful time, but remaining courteous and respectful with the tax auditor is important, because they make the ultimate decision on the result of the audit. A good tax professional should work with the tax auditor to come to a timely and agreeable audit result. When choosing a tax professional, it's essential to consider their communication style. Do they prefer to communicate via email or phone? Are they available to answer your questions outside of normal business hours? A tax professional who is responsive and communicative can make the audit process less stressful and more manageable.
Technology and Tools
Another factor to consider is whether your tax audit help provider has the appropriate technology and tools to help get you through your audit. Better technology and tools can help streamline the audit process and ensure accuracy. If mistakes are made during the audit, it can take time to correct them, and may reflect poorly on you overall in front of the auditor.
The cost of tax audit help is another important factor to consider. Tax professionals charge different rates for their services. Some charge an hourly rate, while others charge a flat fee. It's essential to understand the fee structure of the tax professional you choose to work with. You want to choose a tax professional who offers fair and transparent pricing. Avoid tax professionals who charge exorbitant fees or promise to reduce your tax liability significantly. When considering the cost of tax audit help, it's essential to weigh the benefits of working with a tax professional. A tax professional can help you save money by identifying potential deductions and credits. They can also help you avoid penalties and interest charges by ensuring that your tax return is accurate and compliant.
Tax audits can be challenging, but with the right tax audit support at your side, you can navigate the audit process with ease and peace of mind. When you file with ezTaxReturn.com, add Audit Defense Protection to your tax return, and you won’t have to worry about tax audit support, should you need it. If you ever get that IRS notice letter, be sure to seek help from a tax professional and ensure that your rights as a taxpayer are protected.