One of the things that keep many of us from going too far in our attempts to reduce what we owe Uncle Sam is the fear of a tax audit. In most situations, the audit process isn’t as scary as most people fear, especially if there is nothing to hide. The following blog post will provide an overview of the audit process and explain certain steps you can take to reduce the chances of being an audit victim.
The IRS Tax Audit Process
A tax audit is basically an IRS request to review a taxpayer’s financial information to confirm that what’s been reported on the tax return is accurate. Getting audited doesn’t always mean there is a problem. Most of the time the IRS choses a particular return for audit based on special formulas that indicate that the return may be at a higher risk for a problem.
All notifications of audits are made by mail. The IRS never informs a taxpayer they are being audited by telephone. The audit process can take place either in-person or by mail.
Audits by mail are the most common by far, with in-person audits usually occurring if the IRS suspects criminal activity or there is a large amount of income or tax debt at issue. Regardless of which audit process is used, the IRS basically just wants to review financial documentation to confirm the tax return has been prepared properly and the amount of tax obligation is accurate.
The audit can finish in three possible ways:
- The IRS concludes the tax return is accurate.
- The IRS believes money is owed and the taxpayer agrees to pay this additional amount in taxes, penalties and/or interest.
- The IRS believes money is owed, but the taxpayer disagrees. In this situation, the taxpayer may request mediation or file an appeal.
Audit Prevention: Things to Avoid
Even if the audit results in no additional money owed, the best scenario is to avoid the audit process. The following tips can help do just that. However, taxpayers must understand that by avoiding the following, the risk of an audit still exists, although the chances will have been reduced.
- Claiming “unusual” deductions: Unusually large or odd deductions given the taxpayer’s situation are red flags for the IRS. A specific deduction by itself won’t make it unusual. But in a certain context, it can be. For example, a $100,000 charitable tax deduction will be unusual for someone making $120,000 per year, but not $5 million.
- Not including all necessary information or documentation: If there is documentation to support a claimed deduction or tax credit, it’s probably a good idea to include it in the return. After all, one of the reasons an audit takes place is for the IRS to substantiate a tax position taken by the taxpayer. So try to avoid the audit process altogether by simply including the information the IRS will be asking for in an audit.
- Preparing a tax return by hand: The IRS claims that e-filing a return will reduce the chances of getting audited, one of the reasons being that an electronically prepared return is less likely to have computational other basic mistakes that might trigger an audit.
- Hiring the wrong accountant or tax preparer: A hired tax preparer or accountant should try to help the taxpayer lower his or her tax bill, but only within reasonable limits. Some tax professionals will try to get business by promising large tax refunds or deductions that are not legal or drastically increase the chances of an audit.
- Careless errors: Whether it’s a simple error in adding up the numbers, writing in the wrong social security number of putting in a former name, any of these could potentially raise the risk of an audit.
If you’re the victim of an IRS tax audit or want to find ways to make sure your tax return has the smallest chance possible of getting audited, you should consider hiring a tax professional. They have a deeper and broader understanding of how the IRS thinks and make the audit process as painless as possible or can help avoid it altogether.