What Does an IRS Audit Consist Of?

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An audit is no reason to panic
An audit is no reason to panic (Image: Image by Flickr.com, courtesy of Juhan Sonin)

If the IRS has flagged your income-tax return for an audit, take heart: You're not alone. The IRS audited about one percent of returns in fiscal year 2008, 1.4 million audits, according to the agency. If your return is audited, your experience may be very different depending on which type of audit the IRS conducts.

Correspondence audit

The most common type of IRS audit by far is the correspondence audit. In this audit, the IRS will send you a letter asking for receipts or canceled checks that relate to specific deductions or items on your tax return. This is the simplest form of audit, and is often resolved when taxpayers mail the requested documents.

A correspondence audit is often handled entirely through the mail
A correspondence audit is often handled entirely through the mail (Image: Image by Flickr.com, courtesy of Kevin Dooley)

Office audit

In an office audit, the IRS requires you to bring specific documents, receipts, canceled checks and letters to a local IRS office. The agent will examine these documents to determine if they verify or contradict any deductions or figures on your tax returns.

An office audit requires you to find your nearest IRS branch
An office audit requires you to find your nearest IRS branch (Image: Image by Flickr.com, courtesy of Kevin Krejci)

Field audit

The field audit is similar to the office audit. In field audits, though, an IRS agent will come to your business or home. During this audit, usually of businesses, an IRS agent will not only study specific documents, but will also examine facilities, equipment and general business operations.

During a field audit, your office will be the setting
During a field audit, your office will be the setting (Image: Image by Flickr.com, courtesy of David)

Should you hire a professional?

During an audit, an IRS agent may ask you several complicated financial questions. You could face serious penalties if you answer these questions incorrectly. That's why many people hire accountants or tax professionals to attend audits with them. These financial pros can take the lead in any type of audit.

A tax pro can keep you out of trouble
A tax pro can keep you out of trouble (Image: Image by Flickr.com, courtesy of Ludovic Bertron)

The final result

After an audit ends, the IRS agent will--usually within a few weeks to a month--make a report on your tax return. If the IRS disallows a deduction or claims you owe more in tax, the report will include a final proposal for settlement. You can appeal that proposal. If the IRS rejects your appeal, you have the option to take the matter to tax court. As this entails courts costs and attorney fees, it may only makes sense if a substantial sum of money is involved.

Will your appeal lead you to the courthouse?
Will your appeal lead you to the courthouse? (Image: Image by Flickr.com, courtesy of Cliff)

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