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The Difference Between a Tax Examination and a Tax Audit

Receiving a notice from the IRS about a pending tax examination or tax audit can be intimidating. These notices are a sign that your tax return and financial records are going to be scrutinized, and you might have to either go to the IRS office and drop off your information or be prepared to welcome an IRS agent into your home or office. If any discrepancies are found in your tax return, you might be subject to fines and penalties.

With that said, the terms tax examination and tax audit tend to be tossed around interchangeably, but is that really the case? Are there any differences between the two? Let’s go over tax examinations and tax audits, as well as everything else that you need to know in order to make the process a little less intimidating.

IRS Tax Examinations Versus Tax Audits

Although people tend to use both terms when discussing IRS tax audits, are there differences between an examination and an audit? Many people wonder if they mean different things. The quick answer here is no – an examination and an audit are the same thing. Both mean that the IRS has chosen your tax return to look at in plenty of detail for a plethora of reasons.

Basically, if you receive a notice stating that you are about to undergo a tax examination or a tax audit, then you’re going to go through the exact same thing, regardless of the terms. This means that you will have to prepare your financial records, check with a professional tax preparer or the firm that put together your tax return, and be ready to answer all of the questions that the IRS may have about your return.

How Will You Be Informed of a Pending Examination or Audit?

Depending on the type of audit and the inconsistencies found in your taxes, you’ll either receive a letter or a certified and official IRS agent will appear on your doorstep. In most cases, a letter comes first. It will describe the type of audit that you’re facing (more on that below), as well as how they’ll further contact you in order to obtain your records.

For example, for a simpler audit, the IRS will request copies of your records, either digitally or on paper. You’ll have to submit these records to them, usually by mail, and they’ll proceed with the audit from a distance. More complicated audits will involve an agent coming to your home or place of business to go through your records. Of course, you’ll receive plenty of warning before they arrive, unless you’ve ignored their previous requests, and they decide to surprise you. This latter option doesn’t usually happen, unless they believe that you owe them a lot of money and have been in noncompliance with their requests.

Overall, the IRS and agents from your state tax agency prefer to warn you in advance and schedule a time for the auditor to arrive. This way, you can have everything prepared for them, making the audit go much more smoothly.

The Many Different Types of IRS Examinations and Audits

Did you know that there are three different possible types of audits? Each is conducted by agents from the IRS or the state in which you reside or filed taxes. Some types are more complicated or in depth than others. They are:

  • A Correspondence Audit – This is the simplest type of audit. You won’t have to go anywhere (besides your local post office to mail in your records), and you won’t have to meet an IRS agent face to face. Instead, everything is conducted by mail. You’ll receive a notice with an intention to audit your records. That notice will have further instructions, such as mailing them a certain type of your monetary records for a particular length of time. Once everything is submitted, the process is finished on your end, unless they need more information from you during the audit. You’ll receive a written notice explaining their findings after the audit is complete.
  • An Office Audit – Office audits are slightly more complicated. With them, you’ll once again receive a written notice. However, this one will instruct you to gather your records (and again, they’ll explain which ones they want to see), and you’ll need to make an appointment to meet with an IRS agent in their office. You’ll need to go there at that particular time, meet with the agent, and give them all of the material that they requested. From there, they’ll either send you home and go through your records to conduct the audit, or complete it while you’re right there in the office. This one also ends with a written notice of their findings.
  • A Field Audit – Field audits are the most complicated of them all. With a field audit, an IRS agent comes to your door or the door of your accountant. These audits tend to be lengthy, as the agent will pour through all of your tax records looking for discrepancies. You usually receive some warning, through a written notice, so that you can prepare in advance for the field audit. However, in some cases, the agent might just pop up unexpectedly, especially if they suspect that you might be hiding records and concealing information. It’s best to be clear with the field auditor and have your information ready when they arrive.

What You Need to do in Order to Prepare for an Examination or Audit

Once you receive notice of an impending audit, you’ll need to do several things in order to properly prepare. First, you’ll need to contact an attorney and an accountant. If you already have an accountant, then you won’t need another one. Just contact the person who did you taxes and holds your records.

Next, you’ll need to gather all of the information requested by the IRS or the state. Any written notice will contain a list of the records that they’ll want to review. This can be anything from your pay stubs to previous tax returns, as well as records of any mortgage payments, your bank statements, various receipts, and even information or statements from any brokerage accounts that you hold. Make sure to have all these things prepared for the auditor and reviewed by your attorney and accountant.

After you’ve gathered your records, it’s time to present them to the auditor. Follow the instructions in the notices, and submit them in the manner requested, either by mail, in person, or in your own office so that the audit can take place.

What Happens After the Audit or Examination?

After the audit, you’ll receive a written notice from the IRS or state tax commission with their findings. You might not owe anything at all, having submitted your tax returns properly. Or they might find that you owe them some money for back taxes due to mistakes that were made or funds that weren’t properly disclosed. Either way, if you owe them, you have the right to appeal those findings, as well as set up a payment plan, if you choose not to fight the results or truly owe money to the state or federal government. Once a payment plan is in place, make sure to follow it to the letter, lest you end up in deeper trouble.

The IRA Tax Examination or Tax Audit Process – What Else You Need to Know

While receiving a notice from the IRS that you’re about to undergo a tax examination or tax audit can be scary and intimidating, it doesn’t need to be. In many cases, the IRS selected your tax return because they have questions that they simply want to have answered or something on your return just didn’t seem right. As long as you filled out your tax return honestly and disclosed everything, then the process will be fairly painless. However, it does help to have the help of a tax professional.

A professional tax preparer knows exactly what the IRS is going to be looking for, so they can help you put together the proper records. This will make the process go more smoothly. In addition, they can act as a liaison between you and the IRS, answering their questions so that you don’t have to. They can assist throughout the entire process, so that you have less worries, whether you were selected for a tax examination or a tax audit, since both are the same.

Contact Us Today

If you have received a request for either a tax examination or a tax audit from the IRS and have numerous questions, then you need the help of a tax professional. Reach out to the tax advisors at Enterprise Consultants Group. We can answer your questions, discuss your rights, and provide actionable options. Please contact us online or at (800) 575-9284 today to schedule a free and confidential consultation to see how we can help you.

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