Episode 430: How Do I Know If I’m Being Audited‪?‬ The Legal Play

For those who have never experienced an IRS audit, your only exposure to the process may be the brief portrayal in TV shows and movies where someone, or a team of people, wearing bland neutral suits shows up at your workplace and declares, “You’re being audited. Show us your books.” The reality of real-life audits is a bit different. If you’re being audited by the IRS, your first notification will likely come through the mail. The dreaded tax letter will be sent to the address on file with the agency, which means if you’ve moved without informing the government, it could be sent to a previous address. Whether it’s sent to the right address or not, the IRS will proceed with the audit, assessment, and collection process.



If you have received a tax letter from the IRS, a tax attorney can provide representation to the agency and guidance to their client on how to proceed.





You’ve Received Notice, but is it an Assessment or a Full-scale Audit?

 Increasingly, the IRS is sending out letters notifying taxpayers of an assessment rather than a full-scale audit. These assessments tend to be income adjustments that the IRS makes on their end due to information they’ve received from reporting agencies. In the letter, the IRS will explain the amount of taxes they believe is correct, with a possible explanation as to why, and then there will be an explanation of your rights to protest this change and the procedure to follow. When a taxpayer receives an assessment letter, they may respond and take steps to protest or appeal the decision. Otherwise, if the taxpayer does not respond, the IRS will move forward with collection. If the taxpayer has underpaid, notices that follow will inform the taxpayer how much is owed.



If the IRS has determined a full audit is necessary, the agency will notify the taxpayer that an audit is underway and that an assessment may be forthcoming. In the past, the IRS would often show up at the taxpayer’s place of residence or business to acquire documentation. Since the COVID pandemic, this part of the process is now largely done online and via telephone.

 Audit, Assessment, Collections: The Three-stage Notification Process

 It generally takes several months to complete an audit, and the taxpayer will be notified by mail throughout the process. Typically, the IRS will communicate with the taxpayer through the audit, assessment, and collection process, and typically looks like the following:



* Audit - The first piece of mail from the IRS will either be notification of an audit or of an assessment. If it’s an audit, the letter will notify the taxpayer that their tax situation is being reviewed. Requests for financial documentation will likely be forthcoming.

* Assessment - Once the audit is underway, or after it’s complete, the IRS will send a letter with an assessment in it. This assessment is the IRS’s official stance on the taxpayer’s position, specifying whether income or deductions are to be adjusted, and whether this will require the taxpayer to remit additional taxes. Following an assessment, the taxpayer will have a brief window where they may contest the IRS’s conclusions.

* Collections - If an assessment is made and moved forward, the taxpayer will receive a collections letter requesting payment.



A tax attorney can provide assistance at any point during this communication. For example, an attorney can help with acquiring or interpreting financial documentation. They can also push back against the IRS’s assessment, arguing on behalf of their taxpayer client and attempting to have the assessment thrown out.

 How Does the IRS Determine Who to Audit? 

The IRS audits one out of every 500-1,000 tax returns a year, and it uses a handful of strategies to determine who to audit, including:



* Random selection - A large part of the IRS’s selection cri...