6 MINUTE READ
Am I at Risk for a Tax Audit?
With only .6% of returns being audited last year, your chances of being chosen for an audit are slim.(1) While that may be great news, it doesn’t mean you can kick your feet up at tax time and take it easy. You still need to ensure your taxes are done accurately the first time.
So how does the IRS choose who they audit? For many, audits are triggered by something that simply doesn’t add up—whether it’s missing income or a deluge of deductions whose numbers look a little too tidy.
That’s why it’s important to maintain careful records for at least three years after filing a tax return.(2) Though most audits happen within that time frame, the IRS can go back as far as six years or more if a major error is found.(3)
Another bit of advice: Don’t try to guess when it comes to your taxes. If you don’t have the paperwork to back up a deduction, don’t claim it. It’s not worth the potential headache.
Don’t let taxes stress you out. A tax pro is the way to go!
How Does a Tax Audit Work?
There are two types of audits: via mail and in-person. You may be relieved to know that more than 70% of tax audits in 2016 were conducted solely via mail.(4) If you are one of the chosen few, you’ll receive a letter from the IRS stating why they’ve selected your tax return for an audit and which area (or areas) they’d like to examine such as “charitable giving” or “medical expenses.”
As long as you respond with the information they need to close the gaps—say a receipt from the charity you wrote a big check to last year—the process should be pretty quick and painless.
In-person interviews make up the remainder of audits, and they can take place in a few different locations like your home, your place of business, your accountant’s office, or an IRS office.
Because in-person audits are generally more involved, partnering with a tax advisor is a must. You’ll want all the expert knowledge you can get, plus they can actually represent you in front of the IRS!
Tips to Avoid a Tax Audit
When it comes to an audit, it’s easiest to look for low-hanging fruit. The IRS will literally attempt to match information on a form, such as a W-2, to what is reported on your tax return. Here are some other tips to put in place to avoid being picked for an audit:
- Double-check your math
- Double-check your Social Security numbers
- Make sure all your numbers match (especially between forms and your tax return)
- Don’t make stuff up!
- Have proof for all deductions
- Check the mail for all W-2s (especially side jobs!)
- Avoid filing amendments
- Leave nothing blank (use a dash or a zero if you aren’t putting a number in a line)
- If you’re in a cash business, be extra meticulous
Documents You May Need During a Tax Audit
Whatever you do, don’t put off dealing with a tax audit. The IRS isn’t exactly known for writing off taxpayers who try to pull a disappearing act. Instead, take a deep breath, gather your paperwork, and contact a tax advisor you trust for advice on what to do next.
Here are examples of documents the IRS might request to see:
- Receipts and bills
- Canceled checks
- Legal papers
- Loan agreements
- Mileage, business or expense logs
- Travel-related paperwork
- Medical bills
- Theft or loss documents
- Employment documents
- Investment statements(6)
In addition to asking you to provide copies of supporting documentation, they may also ask for a written explanation, like a breakdown of what was included in your medical expenses deduction.
To make the process go smoothly, take time to organize your paperwork before you meet with the IRS agent. Being prepared can make the dreaded event a lot less, well, dreadful.
Your Legal Rights as a Taxpayer
Yes, you do have rights when it comes to the IRS—even during a tax audit. The 10 provisions you’re legally entitled to are included in the IRS’s Taxpayer Bill of Rights.(7) A few of those include your right to:
- A clear explanation of why the IRS is requesting information from you
- A prompt, professional and polite IRS agent
- Complete confidentiality of your financial information
- Appeal an IRS decision in a “fair and impartial” independent forum
- Have an authorized representative of your choice represent you during the audit.
What to Expect After the Audit
After you’ve sent in the necessary paperwork or met with an IRS agent, you can expect one of four outcomes:
- No Changes Needed: Your documentation has been reviewed and deemed acceptable. Congratulations! You did your taxes right the first time.
- Make Necessary Changes: If the IRS suggests modifications to your tax return, work with your tax advisor to update it with the agreed upon changes. If you do owe back taxes, be prepared to pay interest and penalties. Unless you’ve just downright cheated on your taxes, you shouldn’t have to worry about doing jail time.
- Wait for a Refund: Believe it or not, an audit can end in your favor. Last year more than $6.5 billion in refunds were given to taxpayers as the sole result of an audit.(8)
- Challenge Findings: If you disagree with the IRS’s findings and you haven’t been able to come to an acceptable resolution with them, you have the right to request a meeting with an IRS manager, pursue mediation or even file an appeal.
Note that you should pay the IRS first. If you are balancing several debts at the same time, always move the IRS to the front of the line.
Minimize Tax Stress
A tax audit may seem like the end of the world, but overall, an audit is much less frightening than you’d think. With an experienced tax advisor in your corner to mediate on your behalf and navigate you through the entire process, you can save yourself a heap of stress.
Whether you’re looking for a pro to help you avoid mistakes at tax time or to walk you through an IRS audit, we can help. Find an advisor Dave recommends in your area today!
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