When tax season is upon us, it is usually when tax professionals get panic questions from clients who are being audited by the Internal Revenue Service (IRS) because they haven't reported their income. It's never a fun situation for anyone. But there are ways to fix the situation so that it doesn't get too overwhelming. Here's what to do if the IRS audits your unreported income.
The first thing that happens in the audit process is receiving a letter from the IRS. Make sure it is from the IRS and not from another agency, such as the Franchise Tax Board, the Employment Department Development (EDD), or the California Department of Tax Administration and Taxation (CDTFA) (For those who live in California).
If the IRS considers that you did not report income on your tax return, you will receive a no-filing notification, commonly known as a CP2000 notification. While this notification is not technically an audit notification, it generally serves the same purpose. The IRS will send it if there is a discrepancy or mismatch between the income on your tax return and the information provided by your employer or contractor (if you are an independent contractor) on Form 1099 or W-2.
The CP2000 notification includes taxes and possible penalties in the event of non-compliance with your income tax return. If you receive a notification, you must respond before the deadline indicated by the IRS. That being said, it is important to consult with a tax professional who has experience with unreported income before automatically complying with the IRS. You may not have any money, not even the full amount displayed. But only a tax professional can determine that for you - for example, if a property is sold, the proceeds will usually be reported to the IRS. However, the IRS will not have the basis amount (there is no information on how much you paid for the property or improvements). As a taxpayer, you must provide additional information, or you will have to pay a tax on the total sale price.
To determine if you really owe unreported income to the IRS, you will need to prepare a few points before meeting with a tax attorney. First, gather all of your W-2 and 1099 forms and compare the income from those documents with your tax return for the year in question to make sure the amounts match.
Even if you find a discrepancy in what you report, let the lawyer determine if the amount is correct and if the amount offered by the IRS is reasonable. If you dispute what the IRS says you owe, you must prepare and submit a response, along with supporting documents, by the due date. Your lawyer can help you prepare your response and request an installment agreement if you are unable to pay the full amount once.
Receiving an audit notification from the IRS is scary, but just because the IRS says you have no reported income and owe money, it doesn't mean that this is a black and white situation. An experienced tax professional will help you remedy the situation to protect you and get the best possible outcome.
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Karen Munoz, EA