Navigating tax season can be stressful, and the possibility of an audit can add to the anxiety. While there’s no foolproof way to guarantee you’ll avoid an audit, understanding what triggers one can help you file an accurate return and minimize your risk. The IRS looks for discrepancies, high unreported income rates, and potential links to abusive tax strategies.
What Actions Could Flag My Tax Return for an IRS Audit?
Several factors can increase your chances of being audited by the IRS. The IRS uses a computer scoring system to identify returns with a high rate of unreported income, so accuracy is key. Here are some common red flags:
- Mismatched Information If the income or other details on your return don’t match what employers, banks, or other third parties reported, the IRS may 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 certain areas or industries. If your return falls within one of those, it may be selected.
- Computer Scoring The IRS uses a scoring system to identify returns that have a high rate of unreported income. Some returns receiving a high score are selected for an audit.
- Court-Generated Reports If a court links you to a potentially abusive tax strategy, such as those designed to hide income or evade taxes, your information may be sent to the IRS.
How Does the IRS Choose Which Tax Returns to Audit?
The IRS employs various methods to select tax returns for audit. These include computer scoring based on potential unreported income, discrepancies between reported information and third-party reports, and involvement in questionable tax strategies identified by the courts.
What Should I Expect During an IRS Audit?
If the IRS selects your return for examination, they will send a letter explaining the next steps. The audit may be handled through the mail, or an in-person meeting may be scheduled at an IRS office, your home or business, or your attorney’s or accountant’s office. During the audit, the examiner may ask questions about your financial records, business operations, or filing history.
After reviewing your documents, the IRS may respond in one of three ways:
- Your original return is accepted, and no further action is needed.
- The IRS proposes changes, and you agree. Sign and return the form by the due date and pay any additional tax due.
- The IRS proposes changes to your return, and you disagree. You may 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 Should I Do if I Receive an IRS Notice or Letter?
Receiving an IRS notice or letter can be unsettling, but it’s important to take prompt action. The IRS will explain the necessary steps in its letter. If the audit is conducted by mail, ensure you submit all documentation by the due date. If you have a large number of documents, you can request an in-person audit.
People Also Ask (PAA)
What happens if I disagree with the outcome of an IRS audit?
If you disagree with the results of an audit, don’t sign the form proposing changes. You can send additional documentation, request a phone conversation with the examiner, or request a conference with a manager or file an appeal. The letter you receive from the IRS will explain how to begin the process.
Is there any way to avoid an IRS audit?
While there’s no guaranteed way to avoid an audit, the best approach is to file an accurate return and understand how the IRS selects returns for review. Ensuring that your reported income matches third-party reports and avoiding questionable tax strategies can reduce your risk.
Should I hire a tax attorney or accountant for an in-person audit?
If you are scheduled for an in-person audit, it may be worth considering hiring a tax attorney or accountant, especially if you don’t already have one. They can help you gather relevant documents, prepare for the meeting, and represent you during the audit.
Understanding the red flags that can trigger an IRS audit and knowing what to expect during the process can help you navigate tax season with greater confidence. By filing an accurate return and addressing any notices promptly, you can minimize your risk and ensure a smoother experience.
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