The chance of being audited by the IRS can be unsettling. While there’s no surefire way to avoid an audit, understanding how the IRS selects returns for review and maintaining accurate records can help. Responding promptly to any IRS notices and knowing your rights as a taxpayer are also essential steps.
What Are the Odds of Being Audited by the IRS?
It’s important to note that the IRS reviews tax returns to verify information, but most returns are accepted as filed. The IRS might be seeking information or clarification, so receiving a letter doesn’t necessarily indicate trouble.
How Does the IRS Choose Tax Returns for Audits?
There’s no guaranteed method to avoid an audit. However, understanding the factors that trigger IRS scrutiny can help you file a more accurate return. Some common triggers include:
- Information Matching: Discrepancies between the income or other details reported on your return and what employers, banks, or other third parties reported can flag your return.
- Related Examinations: If your business partner or investor is being audited, your return might also be selected.
- Local Compliance: The IRS sometimes focuses on specific areas or industries, increasing the likelihood of an audit if your return falls within one of those.
- Computer Scoring: The IRS uses a scoring system to identify returns with a high rate of unreported income, which can lead to an audit.
- Court-Generated Reports: Information may be sent to the IRS if a court links you to a potentially abusive tax strategy, such as those designed to hide income or evade taxes.
What Should You Do if You Receive an IRS Audit Notice?
If you receive a notice or letter from the IRS, it’s crucial to respond by the date specified in the letter. If a tax professional helped you file your return, inform them. Gather all relevant tax records to answer any potential questions. The IRS may conduct the audit via mail or in person.
What Happens During an IRS Audit?
During an audit, the IRS will explain the next steps in its letter. For mail audits, submit all documentation by the due date. If you have too many documents to send, you can request an in-person audit. In-person audits can take place at an IRS office, your business or home, or your attorney or accountant’s office. The examiner may ask questions about your financial records, business operations, or filing history. Hiring a tax attorney or accountant may be worth considering for an in-person audit.
What Are Your Rights During an IRS Audit?
If the IRS audits your return, remember that you have rights, including the right to get help and to appeal the outcome. One of your taxpayer rights is to pay only the tax you owe—no more, no less.
What Happens After the IRS Reviews Your Documents?
After reviewing your documents, the IRS may respond in one of three ways:
- If your original return is accepted, no further action is needed.
- If the IRS proposes changes and you agree, sign and return the form by the due date and pay any additional tax due.
- If the IRS proposes changes to your return and you disagree, don’t sign. You can send additional documentation or request a phone conversation with the examiner. If you still can’t reach an agreement, request a conference with a manager or appeal. Once an agreement is reached, sign and return the form by the due date and pay any additional tax due.
What If You Disagree With the Audit Outcome?
If you disagree with the outcome of an audit, you can request a conference with an appeals officer. The letter you receive from the IRS will explain how to begin the process. What happens next may depend on whether you owe more or less than $25,000.
People Also Ask (PAA)
What Triggers an IRS Audit?
Several factors can trigger an IRS audit, including discrepancies between reported income and third-party reports, involvement with audited business partners or investors, returns falling within IRS-targeted areas or industries, high scores from the IRS’s computer scoring system for unreported income, and court-generated reports linking to abusive tax strategies.
How Can You Prepare for an IRS Audit?
To prepare for an IRS audit, gather all relevant tax records and documents, including income statements, receipts, and other financial records. Organize these documents in a clear and accessible manner. If you used a tax preparer, inform them and seek their assistance. Familiarize yourself with your rights as a taxpayer, and consider hiring a tax attorney or accountant, especially for in-person audits.
What Happens if the IRS Finds Errors During an Audit?
If the IRS finds errors during an audit, they will propose changes to your tax return. If you agree with the proposed changes, you must sign and return the form by the due date and pay any additional tax owed. If you disagree with the changes, you can send additional documentation or request a phone conversation with the examiner. If an agreement cannot be reached, you can request a conference with a manager or file an appeal.
How Long Should You Keep Tax Records in Case of an Audit?
It’s advisable to keep copies of your tax return and any supporting documentation for at least three years after filing. However, if you grossly underreported your income, it’s recommended to keep these records for at least six years. Keeping these records ensures you have the necessary information to respond to any IRS inquiries or audits.
Can the IRS Audit Returns From Previous Years?
Yes, the IRS generally has the authority to audit returns from previous years. The statute of limitations for auditing a tax return is typically three years from the date you filed the return or two years from the date you paid the tax, whichever is later. However, there are exceptions to this rule, such as cases involving fraud or substantial underreporting of income.
Staying informed, organized, and responsive can help navigate the audit process with confidence. Would you like to explore common mistakes that trigger audits?