Nobody likes an audit. It’s a painful, mind-numbing and thorough examination of your taxes and financial information. The Internal Revenue Service performs audits to ensure you are reporting your taxes correctly and adhering to tax laws.
To determine whether an audit is necessary, the IRS compares your tax return to average figures associated with similar accounts. All returns that show elevated figures or other discrepancies are set aside and randomly selected for an in-depth review by a licensed auditor. If the reviewer accepts your return, it will be filed away. If not, your return will have to be examined further.
The four types of audits the IRS may induce you to be a part of are a correspondence audit, an office audit, a field audit or a random review.
- Correspondence audit: This is the most common and simplest auditing process. A correspondence audit means the IRS needs more information from you. They will send you a letter requesting answers to specific questions or clarifications regarding your tax return and you will not have to meet with an IRS agent. This type of audit will result in paying in more money or receiving a refund due to an accounting error.
- Office audit: If the IRS has more serious concerns regarding your return that can’t be solved through a correspondence letter, you’ll receive a letter asking you to meet with an IRS agent at their local office.
- Field audit: A field audit is the most serious audit you can receive. A field audit means your tax issues couldn’t be resolved with a letter or an office visit. In this case, an agent will visit your business to search and verify the legitimacy of your business, employees and accompanied business expenses. If you are selected for a field audit, it would be wise to hire someone with expert knowledge of tax law to be your advocate toward a fair process.
- Random review: If you’re selected for this type of review, the IRS isn’t looking for anything specific other than general inaccuracies. A correspondence letter accompanies these random reviews. If you don’t receive another letter, the IRS has accepted your return.
While the IRS tries to audit returns as soon as they’re filed, an audit can go as far back as three years. In rare cases, the IRS can review, and audit returns as far back as six years.