Are you familiar with the distinction between an IRS audit and an IRS review?
Many taxpayers get these two processes mixed up. In actuality, they involve a variety of phases and can result in a variety of financial results.
Learn the difference between an IRS audit and a review by reading on, then call our experts at Levy & Associates for help.
What Is an IRS Examination?
When you file a federal tax return, the IRS uses a computerized scoring system to evaluate it. This system will examine your return and assign a number of scores indicating its accuracy and legality.
The Discriminant Function System (DIF) score indicates how likely it is that your tax return will need to be amended. The Unreported Income DIF (UIDIF) score, on the other hand, assesses the likelihood that you did not fully state your income on your tax return.
The IRS may flag your tax return for scrutiny if it obtains a high DIF or UIDIF score. A CP05 notification will be sent to you, indicating that the IRS will examine your returns to verify your:
- Withholding of income taxes
- Tax breaks
- Income on Schedule C
- Withholding of Social Security benefits
- Household assistance claims
You won’t need to do anything at this point. The IRS will not issue a tax refund until the above information is verified.
The Impact of an IRS Investigation
The optimum outcome of an IRS audit is that the IRS finds your tax return information to be accurate. IRS reviews are not necessarily indicative of actual difficulties in tax returns because they are based on computerized assumptions.
However, the IRS may examine your records and find that you owe additional taxes. After that, it would issue you a tax bill for the precise amount you owe.
Finally, if the IRS is unable to verify the information on your returns, it may conduct a full IRS audit.
What Does an IRS Audit Entail?
An IRS audit is a detailed assessment of your tax accounts and information to confirm that you have reported and paid the correct taxes. If the IRS decides to audit you, it will issue you a formal notice containing all of the details it needs to verify.
Audits can be conducted by the IRS by mail or in-person interviews. If your IRS audit is conducted by mail, you must send the requested financial records to the address specified in the letter. An IRS official would come to your home or place of business to review the information in an in-person interview.
Following an IRS review, you may face an IRS audit. If the IRS examines your information and finds inconsistencies in your tax returns, it may perform a complete audit to investigate further.
Auditing’s Potential Results
An IRS audit could result in one of three outcomes:
- No changes: The IRS examines your financial information and finds that your tax returns should remain unchanged.
- Agreement: The IRS suggests adjustments to your tax returns, and you agree to them.
- Disagreement: The IRS makes revisions to your tax returns that you don’t agree with.
If you accept the suggested changes, you may be responsible for additional taxes or penalties. If you disagree, you can schedule a meeting with an IRS management to express your dissatisfaction. If you are within the statute of limitations, you can also file an appeal.
What Should You Do If You Receive an IRS Audit or Review Notice?
If you receive notice of an IRS audit or review, read the notice carefully and take the necessary steps by the deadline. Please call our tax specialists at Levy and Associates at 1-800-TAX-LEVY if you require assistance.