- There are 3 kinds of IRS audits: a correspondence audit, a field audit or an office audit.
- Keep all supporting tax documentation for 7 years in case of an tax audit.
- Returns claiming the Earned Income Credit are more likely to be audited by the IRS.
What is an audit?
An audit is an inspection of an individual’s or entity’s books and records by the IRS. If you’re being audited, the IRS will send you a letter stating which type of tax audit applies to you. There are 3 types of tax audits:
Correspondence Audit—You don’t need to physically see an IRS agent for this type of audit. The IRS will request documentation, and you can mail it to them instead of delivering it in person. This is the most frequent type of audit.
Field Audit—If the IRS needs to verify information about your home or business, they may come to see it. Field audits usually involve businesses.
Office Audit—You must be seen in an IRS office and provide requested documentation.
Again… First things to do:
- Call Pilot-Tax – 317-984-7666
- Fax the letter to us – 800-951-8879
- Don’t Call the IRS
- Don’t Pay the IRS
Audit Terms to Know
Lien — This is a legal claim to your property (not seizure) as security for payment of tax debt. Essentially, the IRS is telling you your property is being used as a security for your debt and can be seized if you fail to pay it. If the IRS files a Notice of Federal Tax Lien, all your creditors are publicly notified. Liens may be issued when all of the following occur:
The IRS assesses your outstanding tax liability.
The IRS sends you a Notice and Demand for Payment (a bill that tells you how much you owe in taxes).
You neglect or refuse to pay the entire debt within 10 days after you are notified.
If you pay the tax due or make arrangements for payment within the allotted 10 days, the IRS will send you a Release of the Notice of Federal Tax Lien within the next 30 days.
Levy — A levy is a legal seizure of your property to pay a tax debt. The IRS may seize and sell any type of real or personal property that you own or have interest in, including cars, boats, houses, wages, retirement accounts, dividends, bank accounts, rental income, cash value of life insurance or commissions. This won’t happen unless you’ve first received and ignored a Final Notice of Intent to Levy and Notice of Your Right to a Hearing. These documents are delivered in person, to your place of business or to your last known address by certified mail.
What to Keep In Case of an IRS Tax Audit
You should keep your tax returns and any supporting documentation for your tax returns for 7 years. Supporting documentation may include:
- home mortgage statements
- Forms W-2 and W-2G
- Forms of the 1098 and 1099 series and Schedules K-1
- receipts for employee business expenses
- justification of fair market value for any items donated to charity
- receipts for items donated to charity with value greater than $500
- receipts for charitable contributions
- receipts for rental property income
- brokerage statements
- receipts for qualified education costs
- 401(k) statements
- IRA contribution records
- receipts for items sold at a gain
- home-office-related receipts
- pay stubs
- copy of the front and back of the check you used to pay your tax balance due, if applicable
Which tax returns are more likely to get audited?
According to the IRS statistics, individual returns where taxpayers claimed the Earned Income Credit, returns with Schedule C, and returns with Schedule E or Form 2106 are more likely to be examined by the IRS. The IRS has been focusing on high Employee Business Expenses compared to income. You as a member of a flight crew who travels and takes the per diem deduction are especially susceptible to an IRS audit. Those of you who fly International have an even higher per diem allowance—again, making you a focus of IRS correspondence audits.
For the record: Pilot-Tax has never lost an audit on the per diem allowance deduction!
Your best defense in an audit is to obviously always report all of your income and claim only the deductions and credits to which you are entitled. If you do so, you have no reason to fear an audit.