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IRS and State Representation

Audits and Penalties

A tax audit is an IRS or State examination of an individual or business tax return to verify its accuracy.  There are three types of audits:

  1. Correspondence audits (the taxpayer is mailed a request for additional information)
  2. Office audits (an interview is conducted at a local IRS office)
  3. Field audits (an interview is conducted at a taxpayers' place of business or home)

The IRS has the right to review every item of income and expense that you put on your return, so its best to keep all your records until the statute of limitations runs out.  The statute of limitations is the amount of time the IRS has to select a return for an audit, from the time it was filed.  Generally, this is three years.  If your tax return has a substantial understatement of tax, the IRS looks for six years of records.  If your tax return is fraudulent, there is no time limitation.  Tax penalties can be assessed if returns are not filed on time or the full tax liability is not paid on a timely basis.  They can also result from an audit if the IRS determines that your tax liability is more than you showed on your return.  Penalties can range from a minor amount up to 50% of the tax liability.  Often penalties can be abated if the taxpayer can prove reasonable cause for the failure to file or pay timely, but interest on the underpayment cannot be abated.

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