When you hear the words “IRS” and “investigation” in the same sentence, your stomach might drop a little. Most people dread the thought of an IRS audit or a tax investigation. While they both involve the Internal Revenue Service digging into your finances, they’re very different processes with very different consequences.
What is the difference between an IRS audit and a tax investigation? If you live in Tennessee and you have gotten a notice from the IRS, here is what you should do if you find yourself in either situation.
What Is an IRS Audit?
The IRS audits tax returns to make sure the information you submitted matches up with the data they already have on file. An audit can happen for several reasons:
- Your return had unusual deductions compared to similar taxpayers.
- There were big discrepancies in your reported income versus what third parties, such as employers or banks, reported.
- You claimed large losses or charitable contributions that stood out.
- You have been randomly selected.
What an Audit Looks Like
Not all audits are the same. The IRS conducts several types depending on the situation. They may include:
- Correspondence audit is the most common one. The IRS sends you a letter requesting supporting documents, such as receipts or 1099 forms.
- An office audit means that you have to meet with an IRS examiner at a local IRS office. Nashville, Memphis, Knoxville, and Chattanooga all have IRS offices.
- A field audit requires the IRS to visit your home or business to review your records in person.
Most audits end with the IRS either accepting your return as-is, adjusting it, or asking you to pay additional taxes, penalties, and interest. In some cases, you might even get a refund if they find you have overpaid.
What Are IRS Tax Investigations?
The stakes are higher with a tax investigation. This process is very different from an audit. Instead of reviewing paperwork, a tax investigation looks into whether you committed tax fraud or evasion.
These cases are handled by the IRS’s Criminal Investigation Division (CID). If you are under investigation, it means the IRS suspects that you have committed intentional wrongdoing. This is more than a mistake on your return.
There are several scenarios that can trigger an investigation, including:
- Evidence of intentionally hiding income, such as offshore accounts or unreported cash businesses
- Submitting false tax returns
- Claiming deductions or credits you know you did not qualify for
- Involvement in money laundering schemes
- Whistleblower tips or suspicious activity flagged by other agencies
This is very serious. While an audit may result in paying back taxes and fines, a tax investigation can lead to criminal charges being filed. If the IRS finds enough evidence, you could be facing:
- Felony charges for tax fraud or evasion
- Heavy penalties, up to $250,000 for individuals
- Possible prison time
These are serious issues with substantial consequences. If special agents start asking questions or show up at your door, you should get legal representation immediately.
What Should You Do If You’re Contacted by the IRS?
Whether you’re in Memphis, Nashville, or a small Tennessee town, getting a notice from the IRS in the mail is not something you want to ignore.
If It’s an Audit Notice
You don’t want to panic, but do not ignore it either. You should gather your records, receipts, and documentation. You may be able to handle a correspondence audit yourself. However, for anything more complex, get help from a tax professional or attorney.
If It’s an Investigation
You want to call a tax attorney right away before you answer questions or hand over documents. Unlike audits, investigations can escalate quickly. You never want to incriminate yourself accidentally.
Call Us to Assist with Your Tax-Related Cases
What is the difference between an IRS audit and a tax investigation? They are both serious matters, but one could have you facing criminal charges. Responding right away with the right professional guidance can make all the difference in protecting your finances, your reputation, and even your freedom.
If the IRS has contacted you for an audit or you believe you may be under investigation, contact Easter & DeVore, Attorneys at Law. We are here to help Tennesseans protect their rights and their futures when dealing with the IRS. Contact us today for a consultation.
