What do IRS auditors look for?

On the other hand, office and field audits are much more serious. Not only will the IRS ask you for information to validate your deductions and credits, but it will also take a close look at your lifestyle, business activity and income to see if your tax return is correct. Most tax evasion cases begin with field audits. But don't worry: The IRS prosecutes few taxpayers for tax evasion (about 2,000 each year).

The IRS avoids criminal prosecution of the most egregious tax evaders. When your statement is audited, you are not charged with any crime. An IRS audit is simply a matter of conducting an impartial review of your tax return to determine its accuracy. You are expected to show that you have reported all your income and that you are eligible to apply for all the credits, deductions and exemptions listed on your return.

During each fiscal year, audits are conducted by correspondence, telephone, or through field interviews. Business statements are usually examined in an office or field interview and not by correspondence, due to the complexity of the issues involved in a business audit. Known internally by the IRS as the university exam, correspondence auditing is considered the most basic type of audit. In a nutshell, this type of audit occurs when the IRS finds a small error in your return and asks you to explain it to you by mail.

The engineering agent plays a key role in supporting all IRS organizations that deal with the examination of taxpayer returns. Keep in mind that the IRS auditor has taken the trouble to write and issue an audit report and, because of all the annexes and schedules it contains, the auditor is less likely to change position. According to the Internal Revenue Manual that agents must follow, the IRS audit deadline is 26 months after the due date of the tax return or the date it was filed, whichever occurs later. Area office examiners have little discretion and are generally required to verify income and deductions.

Once the audit is complete, the IRS agent issues an audit report that will address all tax issues. More information gives the auditor more ammunition to perform evaluations and, therefore, brevity is the key to conducting a successful audit. It will depend on the type of audit you perform, but for a mail-order audit, the IRS normally grants a one-time extension of 30 days. No one can be 100 percent sure what their audit risk is or can fully verify their tax return, but prudence is the best way to protect yourself.

The IRS auditing experience can be simple if you're prepared, but you're likely to find yourself on the defensive if you're not. Taxpayers often make early withdrawals from tax-favorable retirement accounts that don't meet one of the exceptions that would allow an early withdrawal not to be taxable. Missing deadlines and incomplete responses create more notices and a greater likelihood that the IRS will close your audit and impose additional taxes on you. It depends on the facts, it depends on the circumstances, and it depends on how far apart you and the auditor are.

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