Tax Audit-Common Questions Answered
Tax audit-a phrase that strikes fear into most hearts. A tax audit is something we all want to avoid, but many are not prepared for what to expect. This article will answer some common questions about dealing with a tax audit.
How Likely is a Tax Audit?
This is one of the most common questions about tax audits. The good news is the probability is low. From 2010-2018, IRS data reveals that they examined 0.60% of individual returns and 0.97% of business returns. That is a less than 1% chance in either situation.
Can the IRS Audit Me, Even if My Returns are Correct?
Simply put, the answer is yes. While most audits are targeted due to red flags, there are occasional random audits. The IRS uses a formula to select returns worth auditing. This formula compares your tax return against “normal” tax returns. Anything that stands out as being out of the ordinary could end up getting your return tagged for an audit.
Why Would the IRS Audit Me?
There are a few common items that may trigger an audit. These include:
- Your third party forms (like W2s and 1099s) do not match what is on your tax return.
- The expenses on your return look excessive in comparison to your income.
- Your return is sloppy (i.e. simple mistakes, both numeric and alphabetic).
- You report a pattern of losses on your Schedule C (business) and/or Schedule E (rental income). The IRS requires you to report income after a certain time frame.
How Does an Audit Start?
There are two types of audits: in person and on paper. At least 80% of all tax audits are paper audits, which means they are conducted through the mail. A paper audit starts when you receive a letter from the IRS requesting additional information about your tax return. You will need to respond to this letter with the requested information.
An in-person audit also beings with a letter. This letter from the IRS will include instructions on what they need from you and where the face to face tax audit will take place.
How Far Back Can the IRS go for a Tax Audit?
For most returns, the statute of limitations is three years from the due date of the return or from the date of filing, whichever is later. However, if you underreport your income by 25% or more you can receive an audit for up to six years of tax returns. Additionally, if you file a tax return with false or fraudulent information, there is no time limit on when the IRS can audit you. ‘
What Does the IRS Look at During an Audit?
What information the IRS will need access to will depend on what the audit is bringing into question. If the IRS is investigating something specific, like your health care expenses. You would only need to provide the related supporting documentation such as receipts from doctor’s appointments and prescriptions.
If the investigation is for a broader topic, like proving your business income, the IRS may require you to disclose your bank statements or business records for review.
What Happens When the Audit is Over?
There are three possible outcomes once the IRS completes your audit. The first outcome is that there is no change. This means the amount you owe, or the amount of your refund does not change. Second, you can agree to the changes the IRS proposes and pay any additional amount you may owe. Lastly, you can disagree with the IRS’s ruling and appeal.
Can an Audit Result in Criminal Charges?
IRS audits are civil matters. However, if your auditor suspects that something criminal is going on with your return, they can refer your return to the Criminal Investigations Department. This referral will happen if they suspect tax fraud, concealing foreign assets, or money laundering. If the Criminal Investigations Department finds evidence that could lead to criminal prosecution, they will turn the matter over to the Department of Justice, Tax Division, or the U.S. Attorney’s Office.
Surviving an Audit
A tax audit can seem overwhelming and daunting. But it is possible to survive one. The main key to surviving a tax audit is supporting documentation. Make sure you can back up what you report on your taxes with valid documentation. If you are unsure about how to proceed your can also enlist the help of a tax attorney, CPA, or and EA.
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