Receiving an audit notice from the IRS can be unsettling, but understanding what triggers an audit can help you prepare and potentially reduce your risk. The IRS reviews tax returns to verify information, and certain factors can increase your chances of being selected for examination. Filing an accurate return is the best way to avoid an audit.
What Factors Increase Your Likelihood of an IRS Audit?
Several factors can make you more likely to be audited. The IRS uses various methods to identify returns with a high probability of errors or unreported income. Here are some common triggers:
- Information Matching: Discrepancies between the income or other details reported on your return and the information reported by employers, banks, or other third parties (like 1099 forms) can flag your return.
- Computer Scoring: The IRS uses a computer scoring system to identify returns with a high rate of unreported income. Returns receiving a high score are more likely to be selected for an audit.
- Related Examinations: If your business partner or investor is being audited, your return might also be selected for review.
- Local Compliance: The IRS may focus on specific areas, industries, or types of transactions. If your return falls within one of those areas, it may be more closely scrutinized.
- 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 uses a combination of methods to select tax returns for audit:
- Random Selection: Some returns are selected randomly as part of the IRS’s Taxpayer Compliance Measurement Program (TCMP). This program helps the IRS update its methods for detecting errors and noncompliance.
- Data Analysis: The IRS uses computer programs to identify returns with a high probability of errors or unreported income based on various data points and industry benchmarks.
- Informant Tips: The IRS also receives tips from individuals who suspect someone of tax evasion. These tips can trigger an audit if the information is credible.
What Happens During an IRS Audit?
If your return is selected for examination, the IRS will notify you by mail, explaining the next steps. The audit may be conducted via mail or in person.
- Mail Audit: You’ll be asked to submit documentation to support the items on your tax return by a specific due date.
- In-Person Audit: The audit may be held at an IRS office, your business, home, or your attorney’s or accountant’s office. You should gather all relevant documents and be prepared to answer questions about your financial records, business operations, or filing history.
After reviewing your documents, the IRS may:
- Accept your original return, in which case no further action is needed.
- Propose changes, and if you agree, you’ll sign and return the form by the due date and pay any additional tax due.
- If you disagree with the proposed changes, you can send additional documentation or request a phone conversation with the examiner. If you still can’t reach an agreement, you can request a conference with a manager or appeal.
People Also Ask (PAA)
What if I disagree with the audit results?
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.
Can I avoid an IRS audit?
There’s no guaranteed way to avoid an audit. The best you can do is file an accurate return and understand how the IRS decides which returns to review. Ensure all income is reported and that deductions are properly documented.
What are my rights during an IRS audit?
If the IRS audits your return, you have rights, including the right to get help and to appeal the outcome. You also have the right to a fair and impartial audit.
Understanding the factors that increase your likelihood of an audit can help you file more accurate tax returns and potentially reduce your risk. While there’s no foolproof way to prevent an audit, being diligent and honest in your tax filings is always the best approach.
Would you like to explore common tax deductions that might trigger an audit?