If there is an ‘A’ word that strikes fear in the normal human being, it’s ‘Audit’.
The official definition of an audit is: an official inspection of an individual’s or organization’s accounts to ensure the taxpayers are complying with tax laws and reporting the correct amount of tax, income, and expenses.
The real definition, to which most can relate, is: an official inspection of your records, accounts, your teeth, and digestive tract beginning at the rear.
There are four types of audits: Correspondence, Office Audit, Field Audit, and Taxpayer Compliance Measurement Program (TCMP) Audit
You go to your mailbox and discover a letter from the Internal Revenue Service. The IRS sends a letter in the mail requesting more information to substantiate the claims on your tax return. It could be copies of receipts, logs, or time sheets. You simply supply what is requested via mail following the instructions in the letter. This is the least severe audit.
With an office audit, you are being called to the carpet, literally. You will get a letter in the mail requesting that you come into an IRS office for the audit, as they require more information about your return. This is a more serious level audit. Before attending an office audit, I recommend asking the agent what information they would like to review.
This is the IRS version of ‘Guess Who’s Coming to Dinner’. This is the type of audit you see on TV where the IRS comes in and takes over your business, and they type of audit that everyone fears. With a field audit, the IRS visits your home or place of business. This is the most serious level audit. They do not want to limit themselves to what they may ask to see.
Taxpayer Compliance Measurement Program (TCMP) Audit
Very few people have heard of this type of audit. The IRS will analyze Every. Single. Item on the tax return, and Every. Single. Part of the return must be substantiated by documentation. Every line of the tax return is audited therefore you have to provide documentation for all deductions not a selected few items. This type of audit is really to collect data for the IRS. While this practice is currently suspended, it can be reinstated at any time.
You do not have to go through the audit process alone. You can retain the services of an Enrolled agent, Attorney, or CPA.