Taxes can be intimidating. Add in the risk of being audited by the IRS, and filing your annual taxes just became daunting! Accountants can help to guide you through this stressful process. But what if you don’t have an accountant? Without a professional assisting you, it is important to understand what being audited means and what is expected of you as a taxpayer.
Tax Audit Basics
Throughout the tax season, the IRS constantly monitors incoming returns and may choose to audit a specific taxpayer or business to verify the accuracy of a return. Although the odds of getting chosen to be audited are in your favor with an audit rate of less than 1%, it is still a possibility and something that should always be taken very seriously.
- Who Can Be Audited? Any taxpayer can be audited by the IRS. However, there are red-flags that may be increase your chances of being audited.
- What Happens During an Audit? If the IRS chooses to audit you, you are typically notified by mail. The IRS will request specific documents they wish to verify and further instruction to complete the audit.
- How Does the IRS Select Who Gets Audited? Although the IRS may select your return to be audited randomly, there are some triggers that may increase your chances of being selected.
- Typically—but not always—those who are randomly selected for a review of their return are individuals who are in very high income brackets. This is because the IRS is looking for inaccuracies. The IRS has a higher chance of getting more money that is owed to them if the high income taxpayer has made inaccuracies compared to a low or middle income taxpayer.
- The IRS has software that reviews returns for red-flags. Common triggers for further investigation may include:
- Returns with duplicated information such as social security numbers or multiple people claiming the same dependent.
- Unreasonable or unrealistic tax credits and deductions to alter your refund or taxable income. An example of this may be claiming 60-70% of your annual income was donated to charities.
- Failing to claim income will also warrant a review of your return. All employers send a copy of your W2 or your 1099 to the IRS. If you fail to include taxable income this will red-flag your return.
Although these are only some of the more common triggers above, the IRS has very smart technology to rule out and determine which returns should be further reviewed. The IRS may also compare your return figures such as income, deductions, and credits to other tax returns in your tax bracket. If something stands out, you may be subject to further review. Typically, before your return is officially under audit, a human will review the questionable information to determine if an audit is necessary.
In the circumstance that you are being audited by the IRS, there are some steps you should take to avoid potential fines and consequences.
- Contact Your Accountant: If you used a CPA or an enrolled agent with the IRS to file your taxes, then they can represent you during this time. Having someone represent you will ensure your rights as a taxpayer are upheld. They can also assist you in understanding and reviewing the audit. If your accountant is not an enrolled agent with the IRS or a CPA, they can still answer any questions you may have related to your audit. If your accountant helped in your tax preparation, then they may be able to guide you as to which document is needed or where it is located.
- Carefully Read the Notification: If you have received word of being audited in the mail, it is crucial to read the instructions carefully. The letter will list which documents to send to the IRS to help validate your tax return. The IRS requests copies of the documentation, not the original. The IRS will also want a description with the documentation. Common requested documents include:
- Receipts: Receipts can be for business expenses, mileage, or charitable donations. It is important to list any imperative information related to the receipt such as dates, attendees, and purpose.
- Legal Documents: If you had a life event or legal situation occur, the legal paperwork may be requested. Examples of this may include marriage certificate or divorce decree, custody paperwork, inheritance documents, or property agreements.
- Send Documentation: Once you have the requested documentation ensure you send it within the requested timeframe and with tracking information. To avoid extra penalties or fines, you must send the documentation within the requested timeframe unless you request an extension. You will be notified if the extension is granted or declined. It is also important to send the information with a mail service that provides a tracking number. This will ensure delivery of the documents and provide proof you sent the paperwork.
- Wait For Conclusion: Once the IRS has all of the requested documentation, they can continue their review of your tax return and come to a conclusion. In some cases, the audit may conclude without making any changes. In the case that changes will be made to your tax return, you have the right to agree and accept the changes or to disagree and file an appeal with the IRS.
The idea of being audited by the IRS may add to the stress of filing your taxes, but it is important to understand the process and what is expected of you. Although your taxes are being scrutinized for accuracy, you still have rights as a taxpayer. Having an accountant or enrolled agent with the IRS will provide you with representation and the assistance you need to conclude your audit. After-all, you don’t want to mess with the IRS.