IRS Audits

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Being audited by the IRS can be a very stressful event for individuals or business owners. People immediately think they either inadvertently did something wrong when they filed their tax return, or they believe the IRS found out about something they were trying to hide in their tax return.

But audits may occur for several reasons, sometimes even randomly. The IRS computer system may select a tax return for audit. Each return entered into the IRS computer system receives a numerical score. If your score is high, there's a good chance you may be audited. For a business, the score depends on various factors, such as high auto expenses, low gross profit margin, little or no business profit, or high travel and entertainment deductions.

For individuals, as their income increases, so do their chances of being audited, although the average American's chances of being audited are actually less than 1 percent. Some flags that may trigger IRS audits of an individual's tax return include having a return with a large amount of itemized deductions, unreported taxable income, a record of tax deficiency, large charitable donations of cash, claims of tax shelter investment losses, reporting rental expenses, or having had a prior audit. Sometimes even taking all of your legitimate tax deductions may be cause for an audit.

There are four main types of IRS audits:
1)Correspondence Audit - the IRS will mail a letter to request copies of receipts for expenses you claimed;
2)Office Audit - you are responsible for bringing all requested documents to the IRS at an appointed time;
3)Field Audit - an IRS agent comes to your residence or business and either goes through your files with you or takes them back to the office for further examination;
4)TCMP Audit - a total audit where everything on your return must be validated.

The IRS has the ability to take your house, though the Taxpayers' Bill of Rights discourages them from seizing primary residences. However, vacation or rental property can still be seized. The IRS collector must get a court order, which you are able to contest. You may also request help from the Taxpayer Advocate Service to stop the seizure. The publicity that the IRS receives from seizing taxpayers homes is usually bad, so they do not like it and usually don't do it unless you have completely failed to communicate or cooperate with the collector.

It's vital to be organized and have all appropriate paperwork and documents at hand and organized in the event of an audit. You are only responsible to supply the documents the IRS requests. Most tax attorneys advise to never offer additional information. Be sure to make copies of all your documents and receipts and keep the originals yourself. A tax attorney may act as a representative through the audit process. Once the auditor reaches a decision, you can either agree with it and pay the amount owed, or you can choose to disagree with the findings and appeal the decision. If the appeal fails, then a petition can be filed in tax court. If the audit bill is for less than $50,000 then it will be a simple and inexpensive process, but if it's more a tax attorney is usually needed to help you. Around half of the people who challenge an audit report are successful in at least partially lowering their tax bill..