After you file and submit your taxes, you hope that you avoid hearing from the IRS for the remainder of the year. However, if your return is flagged for review, you may be notified about the IRS publication 556.
Rather than panic or try to avoid the IRS and its review of your return, you can prepare by understanding what this publication entails. You can use also this information to determine how you will face the IRS during the audit.
Understanding IRS Publication 556
Publication 556 explains the IRS' examination of returns, appeals rights, and claims for refunds. It details how returns are marked for examination and what your rights are in case your return is selected for an audit.
The IRS uses a computerized method called the Differential Inventory Function System, or DIF, to assign a score to every tax return it receives. Those that receive a higher score are set aside for further review.
Some of the reasons that DIF may score your return higher include:
- Information from your W-2 or 1099 not matching information on your return
- Questionable entries
- Study the behavior of taxpayers in handling similar tax review situations
- Information received from third parties like newspapers, public records, and individuals about possible non-compliance with tax codes
If your return is marked for review, the IRS by law has to notify you in writing to give you ample time to prepare. It also has to notify you in writing if it plans to speak with your bank, neighbors, employees, or employers about your review.
Preparing for Your Audit
After you receive notification of your review, you should decide if you want to represent yourself or if you would fare better to hire a tax professional to help you. You may decide to represent yourself if you:
Have all of the required documentation like returns and receipts on hand for the audit
- Can remain confident in stressful situations
- Are not easily upset, confused, angered, or intimidated
- Understand the tax forms required for your case
- Are not relying on questionable Internet sources for research
- Understand the tax laws as they pertain to your review
- Have the time and energy to devote to what could be a lengthy review process
Likewise, before you actually meet with the IRS judge, you should prepare by:
- Knowing what information is needed and avoid volunteering details that are not relevant or requested
- Knowing your rights, especially if the IRS finds against you
- Keeping your records organized
- Making copies of all required documentation like returns and receipts
- Ignoring unreliable Internet websites for research
Above all, you should not ignore the IRS, as the audit will go away on its own. You should remain committed to the auditing process, even if you believe that the case could turn against you or you could end up owing more money. If you see the review to the end, you could end up with fewer penalties than expected or even receive a refund from the IRS.
When to Hire a Tax Professional for Help
Many people would never entertain the idea of going to an audit alone without professional representation. While you legally can represent yourself, you may want to hire a tax professional for guidance if you:
- Do not understand the tax codes
- Want your case handled by someone who knows what he/she is doing
- Need to reduce your stress
- Are afraid of being intimidated
- Do not know the limitations of the law
- Want to rely on someone who may have inside information about handling your case
When you hire a tax professional, you will have skillful representation with you when you meet with the IRS. Your representation will help you avoid the worst penalties and make sure that you are dealt with fairly. You also can avoid the stress of having to prepare your case alone.
When the DIF system has marked your tax return for review, you need to understand how IRS publication 556 pertains to you. You can properly protect yourself by knowing when to represent yourself or allow a tax professional to help you during your audit.
