Tax Tips

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.
• 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.

How to Prepare for an IRS Tax Audit

Always provide anything the IRS asks for within the requested amount of time. If you're asked to appear before the IRS, you should bring along your tax return and all of the supporting documentation for the tax year in question, along with anything else requested in your IRS letter. However, don't let the tax auditor keep any of your originals — always provide the auditor with a copy of everything requested.

If you used an H&R Block office, H&R Block Online Office or H&R Block Signature, and purchased our Peace of Mind^® Extended Service Plan, an H&R Block enrolled agent can represent you in the event of an audit. Contact an H&R Block office to file a Peace of Mind^® claim or refer to your Peace of Mind^® agreement for further information.

Many of H&R Block's TaxCut online or TaxCut software programs include Worry-free Audit Support^® when you e-file your federal return. With Worry-free Audit Support, you have access to advice and guidance, plus the opportunity to be represented by an H&R Block enrolled agent in case of an IRS audit.

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 (such as H&R Block's DeductionPro) for any items donated to charity
• receipts for items donated to charity with value greater than $500
• receipts for charitable contributions (including cash contributions made after 2006)
• 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.