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What Happens During a Personal Audit

Updated: Jul 20, 2022

In a personal audit situation, the IRS wants to do an analysis of your tax return for a specific time period. When it comes to being audited, most individuals feel panic. But, having the right documents in place and having a great tax professional on your side will give you more peace of mind during an IRS audit. Here are some things you should know when you are getting personally audited by the IRS.


Respond to the Letter from the IRS


When you receive a letter from the IRS about a personal audit, the first step you must follow is: respond to the letter. The letter may seem scary or intimidating, but responding is crucial. The letter will state the time period that is being audited. Pay attention to what filing year you must address. The IRS has the right to audit 10 years prior to the current year.


Amend the tax return

If you amend your tax return, submit all of the proof for the amendment to the IRS as well. This means submitting bank statements, receipts, a detailed general ledger, or other documents. For example, if you claimed a child who is in college as a dependent, and you claimed their college tuition for the AOTC , you (American relief), provide the tax document from the university as proof.


Receive their response

After you have submitted your proof and tax amendment, the IRS will send you a letter to either confirm or deny the proof. If they confirm your proof - congratulations! You are done with the audit.


If they deny your proof, call Paul's Bookkeeping to perform an internal audit for you. We will help you sift through documentation and analyze what the IRS is looking for.


What the IRS looks at during an audit

During an audit, there are specific things the IRS considers. Specifically, they are looking for income that was not claimed. This is why having accurate W-9 forms and W-2 forms is important. They are also on the lookout for misused credits and deductions. Most commonly, a personal audit is initiated by the IRS because of claimed credits by the tax payer.



Penalties, fines, and interest

When the IRS identifies unclaimed income, or misused credits and deductions, you may be responsible for additional tax payments and fines. It is common to have to pay 50% more of what you would have owed if you had accurately reported your income. In the above example of the AOTC credit, if the IRS audits your returns and find your AOTC claim is incorrect, not having the documents to show you qualified means that you must pay back the amount of the AOTC you received in error - with interest! The IRS may also charge you an accuracy or fraud penalty. Another penalty you may be facing: you can be banned from claiming the AOTC for two to ten years.



Things you can do to avoid a personal audit


Don’t:

  1. Claim a non-working spouse as a dependent

  2. Misuse the Earned Income Tax Credit

  3. Claim dependents who you don’t have the right to claim. (E.g. You are the parent of a child, but you don’t take financially take care of the kid.)

  4. Misuse a Gift Receipt Deduction - anything of value over $15,000 in a calendar year. You are trying to limit or lower or tax liability. The other party has to recognize it as income and possibly be taxed on it. E.g. money for a car - there’s no tax benefit for …. Doesn’t fit qualifying deductions. Not medical, not mortgage interest.


Do:

  1. Work with a knowledgeable tax preparation professional, like Paul's Bookkeeping and Tax Services. Hire someone who knows and thoroughly understands the tax laws.

  2. Call us before you claim a gift receipt deduction.

  3. Double check the details of eligibility for a tax credit before you claim it.

  4. Keep all of your documents for 10 years prior to the current year.


Getting audited? Call Paul's Bookkeeping and Tax Service

When you work with us, we upload any and all tax documents provided by you. We also submit the proof to backup the return submitted. During an audit, we print off the tax document and provide the IRS with all information requested.


PBK provides reliable and bookkeeping services at an affordable price. When you hire us to help you manage your financial records, you trust that it's correct - down to the penny. Call (806) 352-6085.



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