For many Americans, the thought of any interaction with the IRS brings on feelings of dread and anxiety. The simple truth is that the IRS as a whole is intimidating.
In fact, 47% of Americans say they feel anxiety when they receive any correspondence from the IRS, audit-related or not. While 65% feel very confident that their tax return has been done correctly, 29% of Americans still sweat out the possibility of facing an audit.
There’s the perception that a tax audit means pulling every piece of paper related to your finances, sitting in a windowless room across from a stern-looking IRS auditor, and sweating out the outcome. There is a real fear of the power the IRS holds.
Let’s demystify an audit by the IRS. Nobody likes the idea of an audit; that’s easy to agree to. But the IRS audit is often not as complex as maybe it’s perceived.
The key to avoiding an audit is how well you go about your preparation for tax season. If you think you’re about to get audited, what should you do, though?
Read on for a comprehensive guide to an IRS tax audit so you can get prepared if needed.
What Is an IRS Tax Audit?
It’s smart to begin the basic tax audit meaning since there is this very derogatory perception of an IRS tax audit. An IRS tax audit means the IRS wants to review your tax filing and financial documents. They want to ensure you have followed tax laws and there aren’t any inaccuracies on your document.
For example, you may owe some back taxes and have consistently owed the IRS money each year. Suddenly, your tax filing shows the IRS owing you a large sum. They may want to verify how such a change in events occurred.
It’s good to shift the readily held perception of a tax audit. The IRS is looking to verify the correctness of your tax filing. They aren’t looking for ways to trick you into being wrong. The job of the IRS is to make sure the correct amount of taxes get paid.
Reasons You Might Get Audited By the IRS
You might have the dreaded letter from the IRS informing you of an audit and think, why me? So, what are the reasons the IRS opts to perform an audit?
Sometimes, you have a little bad luck in a random draw for audits. These are relatively uncommon now that the IRS is struggling with understaffing. A random audit means the computer compared your tax filing with others like it and selected it for a tax audit. You might also get selected for an audit if your tax returns are connected to someone else who is also getting audited.
There are also some red flags for the IRS that tell them you should get considered for an audit. These things might include:
- Making mistakes in your math on your tax returns
- Using round numbers like you’re guessing versus using specific numbers
- Typos, especially for important data like your social security number
- Skipping cryptocurrency information on your taxes
- Not disclosing all of your taxable income
Try hard to avoid these mistakes, so you don’t get the attention of the IRS.
How Common Are Tax Audits
The good news about a tax audit is that the odds are likely in your favor. The IRS completed 509,917 audits last fiscal year, a number which is down a whopping 771,000 audits from 2019.
Of those audits performed in 2021, the IRS was able to bring in $12.9 billion extra in taxes, which might be bad news for those audited. In 2020, the IRS concluded 10,890 audits for those tax returns worth more than a million dollars in earnings.
The other group of Americans more subject to an audit include those making less than $25,000 a year. In fact, a study found that about 13 tax returns out of 1,000 people in this group faced an audit. It seems, like many industries, the IRS is suffering from some staffing shortages. In 2020, the IRS had nearly 76,000 full-time auditor-like positions, a number down a solid 20% from just ten years earlier. These staffing shortages have also directly reduced the number of audits.
Things to Understand About IRS Audits
Despite any statistics, it’s good to remember that, generally speaking, an IRS audit is pretty rare for individuals. In most cases, they are handled through the mail versus sitting in front of the dreaded auditor face-to-face.
Those face-to-face audits are even rarer. Whether you’re audited or not, remember too that auditor’s ruling doesn’t have to be the final word. You always have the right to appeal the audit ruling if you disagree.
There are a few important things to remember if you’re faced with an audit, though:
- Don’t ignore IRS deadlines
- Get your stuff organized
- Better audit outcomes happen when you have your documentation ready
- Don’t give the IRS more than what they ask for
- Only answer what’s asked without providing additional information
- Never hand over original documents
- Make copies and keep a list of everything you submit
Unfortunately, most of the people the IRS chooses to audit are not random. More often, those getting audited show some signs of the error to the IRS. It’s crucial that you approach your audit with the documentation you need.
Types of IRS Tax Audits
There are different types of tax audits. In most cases, there are three different types of audits.
Probably the most common and misunderstood type of audit is the correspondence audit. The IRS completes this audit via writing back and forth with you instead of face-to-face. The IRS says it conducted nearly three-quarters of its audits via correspondence.
An office audit can also happen. In this case, you will go into an IRS office to meet with an auditor. This meeting will likely last several hours, and you want to have a professional tax expert with you.
The last kind of tax audit is a field audit. This is more common for a business than for an individual. The auditor would come to the business or place where the business records are held. This type of audit can last several days because of the depth of information.
How Does the IRS Notify About an Audit?
It’s very important to know that you will get a letter from the IRS regarding an audit. They will never contact you by phone. No matter how authentic a phone call might seem, it is not legitimate and is probably a scam.
The IRS uses a variety of letters to communicate with taxpayers. Most commonly, they will use Notice 566S to inform you of an audit. While a letter can be easier to ignore, you never should. It’s important to read and understand what the letter says – then you’re unsure how to proceed, it’s wise to seek the help of a tax professional.
How Far Back Will the IRS Go Back for an Audit?
It might feel like when facing an IRS audit that they are about to dig through your personal financial history. In fact, usually, the IRS will only go back three years in your tax filings. If the IRS does find something like a more significant error, they could opt to go back as far as six years.
It’s for this reason that, as a taxpayer, it’s essential to keep your records for this period of time in case you’re ever facing an audit.
Preparing for Your Tax Audit
Again, you will be notified by letter that you’re being audited by the IRS. While you might be tempted, the worst thing you can do is choose to ignore the letter out of fear.
Start by carefully reading the letter that’s been sent to you. It will give the reason your tax return was chosen for an audit. It will also provide the necessary directions for what you should do next. If the letter requires a response and/or action to be taken, having a tax professional to respond to the IRS for you is the safest option.
Understand the Depth of Your Audit
It’s important to take the time to understand the scope of the audit you’re facing. Remember, many audits are handled solely by mail. Sometimes the audits are simply a matter of providing a little additional information or documentation to the IRS. The letter should give some perspective on what they’re looking for and help you to go to the next step of getting prepared.
If the IRS suspects there needs to be an adjustment made to your tax return, they will provide you with an Information Document Request. Again, it’s important to pay attention to their deadlines. Once the IRS has all of the information they want or need, they will provide you with their findings.
Results of Your Audit
There are a few ways your tax audit can evolve.
Your tax audit might show that you were right all along, given IRS received all the documentation they needed, and it all worked out.
It could also be a simple error in your taxes, like a minor math error that has insignificant changes to your tax liability.
The IRS might say you owe more money. You can either pay the IRS what you owe or have a tax professional negotiate a payment plan on your behalf to repay the amount owed.
It’s good to remember that if you disagree with the auditor’s outcome, you can appeal their decision. In this case, if you get help from a tax professional, they will request a meeting with the IRS examination office to resolve your audit findings.
Get Help Going Through the Audit Process
If you’re facing an audit, it makes sense to get some help with the process. This is one time it might not make sense to try to go it alone.
You don’t want to make any mistakes navigating the audit process. At Polston Tax, solving your tax problems is what we do!
Getting the assistance of a tax professional to guide you through the audit process can help you avoid other mistakes and improve your chances of a positive outcome in your audit.
Facing Your Tax Audit Head On
The idea of a tax audit might sound just awful. The IRS is anxiety-provoking for many people. Yet, you can get through it with the right preparation and assistance.
It’s important to get the help of a professional tax specialist who knows tax law and how the IRS works. Contact us today for assistance with your tax needs or if you’ve received a letter from the IRS about a tax audit.