When you think of an IRS audit, you probably think about threatening letters from the IRS followed by potential penalties. What you may not have realized is that there are different kinds of audits. Here’s an overview of the the different types of IRS audits and what they involve.
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This post is provided for general information only. Please confirm the details and circumstances of your unique situation with your tax accountant or other appropriate advisor before taking action.
A paper audit is an audit that’s conducted entirely by mail. With this type of audit, the IRS is looking at something specific on your tax return. You get a notice in the mail asking you to send them more information, you mail it in, and they tell you if they’re making changes to your return.
One of the most common types of paper audits is a CP2000 notice. A CP2000 notice says we received information that you earned more income, we couldn’t find it on your tax return, explain what happened or pay additional tax.
Today, most audits are done by mail. This is due to a combination of cost cutting by the IRS and the fact that 1099s and other third-party tax forms create a paper trail that the IRS can follow even when a taxpayer tries to deceive them.
IRS Office Audits
An IRS office audit is a request for you to visit an IRS office near you with your documents. The IRS letter will tell you what to bring and what they’ll be asking about.
IRS office audits are generally used for more complex situations. Instead of needing one or two documents, the IRS needs to be able to ask follow-up questions and have you walk them through complex transactions. These types of audits are more common for businesses and high-net-worth individuals but are possible for any taxpayer.
Office audits are less common today because the IRS has reduced its number of offices in favor of larger, more centralized offices. They’ll almost never ask you to travel an unreasonable distance to an office audit, so they simply can’t happen as often.
IRS Field Audits
An IRS field audit is when they come to your home or business (a field visit for the IRS agent). These are the least common type of audit, and the IRS typically won’t request one if there are no other options.
Reasons for a field audit could include wanting to see your home office to substantiate your home office deduction (yes, they can do that), seeing if you have business equipment that you claimed, or going through your books and records if you said it’s too burdensome to bring them to an IRS office. You can try to negotiate your way out of a field audit, but if the IRS insists, your options are generally to either let them do it or risk them ruling against you.
You Have the Right to Audit Representation
If the IRS contacts you for an audit, you have the right to have an Enrolled Agent, CPA, or tax attorney represent you. For a paper audit, they can write your response for you. For IRS office audits, they can attend on your behalf and keep you from having to go. For a field audit, you might need to be there to open the door, but you can let your representative do the talking.
The most important thing to do is to act now. The deadline on the IRS notice is strict, so you need to get professional help as soon as possible so they have time to review the situation and get your response in on time.