The Dreaded Tax Audit: What to Expect and How to Respond
Getting audited is pretty rare; it happens to less than 1 percent of average taxpayers. However, if you do get selected for an audit, we’ve got you covered. Here’s what what happens when you get audited by the state or federal government.
What Is An Audit?
A tax audit is when the IRS closely reviews your tax return to ensure that you accurately reported your income, deductions, and exemptions.
If you’re selected for an audit, don’t worry — that doesn’t automatically imply that they think you’re a criminal. Many taxpayers are randomly selected for an audit.
Alternatively, you may be chosen if you reported income and/or deductions that are unusual when compared to similar returns.
What Happens in a Tax Audit?
If you are chosen for a tax audit, you’ll receive a notice in the mail. Make sure you read the notice closely, as it will tell you why you’re being reviewed and what documentation you need to provide. You typically have around 30 days to respond to an audit inquiry before the IRS takes action, such as sending you a bill for more taxes owed.
Depending on how serious your case is, audits can happen in one of three ways. Here’s what to expect from the different types of IRS audits:
Correspondence audit: The most common form of audit (it accounts for about 75 percent of all audits), this review is handled via mail. Typically, this audit is for returns with simple math errors or missing forms.
Office examination audit: This type of audit happens at a local IRS branch. An agent will investigate if you failed to report any income and/or if your deductions are legitimate. You can meet with the agent yourself or send a tax professional on your behalf.
Field audit: This form of audit is reserved for complex cases, usually involving businesses. An IRS agent comes to your business or home and conducts a thorough review of your financial records. They will review past tax years, as well. This type of audit can take about a year to complete.
How Do I Respond to a Tax Audit?
If you’re being audited by the state or federal government, it’s time to start gathering your records and documentation. It is your responsibility to prove the legitimacy of your deductions, so you’ll want to collect documents like:
Previous tax returns
Expense receipts
Pay stubs
Home mortgage statements
Missing documentation? The IRS allows you to reconstruct your records, so get duplicates. You can also follow our guide here to retroactively collect evidence of expenses. Request more time if you’re struggling to assemble everything on short notice.
Here are a few extra state tax audit tips:
Study up on audits. When you receive your audit notice, read it closely. You can even ask a tax professional for additional insight. You want to be empowered with an understanding of why your return is being reviewed and what evidence the IRS will need for a favorable result.
Make copies of all your documentation. This way, you can hand over your paperwork to the IRS without worrying about it getting lost.
Don’t provide extra information. Answer only the questions you are asked to keep the investigation on task.
Know your rights. You can bring a CPA, IRS Enrolled Agent, or other tax professional to support you during the audit.
Appeal your results if you disagree with them. After your audit, you will receive a report that lets you know what additional tax is owed. If necessary, there are ways to appeal the audit results.
Will a State Audit Trigger a Federal Audit?
So, what happens when you get audited by state — does that mean you’ll also undergo a federal audit? Not necessarily, according to the Massachusetts Department of Revenue.
That said, an error on your state tax return could effect the information provided in your federal tax return, which could lead to an additional audit.
