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The four types of Tax audits

The four types of Tax audits

A tax audit is an inquiry into an individual or business’s tax records to ascertain whether the facts and figures reported are in par with reality.

Getting the notice of a tax audit from the IRS is a situation dreaded by most taxpayers, one that is sure to elicit feelings of panic and confusion. Most taxpayers cower at the thought of an impending tax audit that they fail to get the required documents in place and educate themselves properly on the processes involved in a tax audit. By implication, they fail to know what documents are required of them and how to negotiate effectively with the IRS official assigned to them, and when the day comes, they find that they are ill-prepared to face their tax audit.

You may be one of those taxpayers who are so busy panicking that they fail to take out time to understand the complexities involved in a tax audit. If so, this post is for you. The first thing to know when you receive a notice of a tax audit from the IRS is which kind of audit is going to be carried out. There are four types of tax audits, and for the purpose of this article, we shall be explaining them all.

Types of Tax audits

The four types of tax audits are:

  • A Correspondence audit:

The first and most common type of audit that the IRS may call you in for is a correspondence audit. Statistics reveal that correspondence audits comprise roughly 75% of all IRS-sanctioned tax audits.

As stated earlier, a correspondence audit is not only the most common but also the simplest form of tax audits. They involve the IRS sending you a letter in the mail (typically known as a 566 letter). In this letter, the IRS will usually request that you clarify a part of your tax return that is unclear or seems suspicious to them. They may, for example, have questions about your listed deductions and ask you to provide documents and receipts that substantiate your claim.

The second type of letter that the IRS may send to you is known as a notice CP2000. A notice CP2000 will typically be sent to you if the information that you have provided on your tax return does not match what is contained in the IRS’s records.

Once you have received the notice, you will need to state whether or not you agree with the IRS’s claims, and if you disagree, you will be required to provide evidence supporting your claim within 30 days from the date you first received the notice. If you agree that there has been an underpayment on your part, then you will need to make the necessary payments to the IRS immediately to begin to negotiate a payment plan.

NOTE: You must never ignore a letter notifying you of a correspondence audit should you receive one. This will only aggravate the issue and cause what should have been a simple inquiry into your tax returns to aggravate into a much bigger situation.

 

  • An Office audit:

If the errors or discrepancies contained in your tax return are too complex for a simple correspondence audit, then the IRS may call you in for an office audit. An office audit is usually carried out when the tax issues in question are too complex for a correspondence audit but too small for a field audit.

If the IRS has issued an office audit against you, you will get a notification letter in the mail informing you that your account has been selected to undergo an office tax audit and instructing you to come to the closest IRS office for the audit.

An office audit may involve more complex processes and are typically called to address issues regarding itemized deductions (Schedule A), business profits/losses (schedule C), or rental income and expenses (Schedule E). Whatever the reason for your audit may be, it is extremely important to give careful consideration to the answers and documents that you provide to the IRS, as one wrong answer or inconsistent figure may give them a reason to expand the scope of the audit. This is why it is in your best interest to seek the advice of a qualified tax attorney before undergoing an office audit.

 

  • A Field audit:

Of all the four types of tax audits that exist, a field audit is the most comprehensive, thorough, and detailed. In a field tax audit, the IRS will visit the taxpayer in their home or place of business to go through their records and determine any discrepancies.

A field audit is so thorough that it is usually reserved to be carried out by the most skilled and knowledgable IRS officials. If you are facing a field audit, there is no way that you can get through it on your own; seek the services of a qualified tax professional now!

A typical field audit involves the examination of financial records, conducting interviews with employees, and taking a general tour of the business facility. It must, however, be noted that an IRS field audit may not be limited to these activities. The IRS officials may ask to see documents outside of the records that you think they may ask for just to allay their suspicions and confirm that everything is in order. This may take as little a day but may also last for up to one week.

A field audit is definitely the most serious form of tax audit that there is, therefore, you will need to retain all the help you can get. Reach out to our team of qualified professionals now at  888-585-8629 or 617-430-4674 or send us an email at [email protected] for immediate professional assistance.

 

  • A Taxpayer Compliance Measurement Program (TCMP) audit:

This is the fourth type of tax audit that exists. The primary reason why the IRS carries out this audit is to update the information that they have for their DIF scores. DIF scores are developed by analyzing a large group, sometimes involving up to 50,000 persons. In a TCMP audit, the IRS randomly selects their tax returns for a round of intensive audits that are conducted every few years.

Once your tax return is selected to undergo a TCMP audit, every part of it will be carefully vetted and each claim must be backed up by the proper documentation. A standard audit may be time-consuming, but a TCMP audit is even worse because here, the taxpayer not only has to provide documentation evidence for a few selected parts of the tax returns but rather for all the deductions listed on the entire document.

Regardless of the type of audit that you have received a notification for, the first thing you need to do is to remain calm. Put your documents (such as your receipts and canceled checks) together, get professional help, and remain calm. Many times, the result of a tax audit is not as drastic as you imagine it will be, you just have to remain calm and prepared.

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