IRS Audits can be daunting, and quite challenging, to say the least for most people. As a matter of fact, it can be seen that IRS audits can take place regardless of the timeliness of the tax filed, as well as the due diligence factored in during the time of tax filing. Hence, IRS audits continue to exist as fear for all taxpayers alike. However, it can be seen that regardless of the existing chance of IRS continuing to audit everyone, not a lot of people continue to be audited by the IRS.
How many people are audited in a typical tax year by IRS?
Under typical circumstances, IRS mostly audits less than 1% of all tax returns that are filed in a fiscal year.
The reason behind such a smaller percentage of audits conducted by the IRS mainly lies in the realm of the fact that IRS in itself receives a fairly large number of tax returns every year. Hence, it is not realistically possible for the IRS to conduct audits for each and every tax return filed.
Who is likely to get audited by the IRS?
Under the general rule of thumb, it can be seen that IRS mostly audits high earners. This is because individuals (and companies) that have a relatively higher income are more likely to have errors in their reported income. However, this does not mean that low-income earners cannot be audited. They can be audited too if there are discrepancies in their reported income. However, the most significant chunk of audits is conducted of the highest income earners.
What mostly triggers an IRS audit?
There are numerous different reasons as to why IRS audits are conducted at random of individuals that have a supposedly discrepant financial standing. As far as IRS is concerned, the audits are decided based on the following factors:
- A computer scoring program is assigned to numeric scores to each individual, and then some corporate tax returns are also analyzed, after they are processed. If the return is selected because of the high score generated under this program, a further examination of the return is probably going to result in a change in the income tax liability.
- Mismatch in reported income and returns: In the case where information on third-party documents does not change, like a W-2, or 1099, then there is a very high probability of the IRS auditing the statement.
- A given line item on the return is questionable. This refers to the incidence that a certain line item has not been classified properly, and hence, it needs to be reclassified at the earliest.
- Information from sources including public records, newspapers, or other individuals that indicates potential noncompliance with tax laws or other inaccuracies in the tax returns. Basically, anything that raises serious or questionable doubt regarding the efficacy of the tax returns might trigger an audit on the part of the IRS.
What is it like to undergo an IRS Audit?
In the case where a return is selected for auditing, the IRS mostly communicates about this using a letter (and an e-mail). In the email, all instructions are present regarding the following steps and procedures that need to be completed by the party that is audited in order to facilitate and fulfill the audit process.
There are several different types of audits that might be conducted by the IRS. The IRS is allowed to conduct the audit process. The IRS mostly conducts business by person, or by mail. IRS agents mostly come to interview at the place of residence, or the office. With every different that is undertaken, there are different outcomes and different results that are expected from the audit process itself.
IRS mostly includes returns from the previous years in the audit and mostly does not go beyond a period of six years. However, there are exceptions in place, based on which the audit duration can be changed.
It must be noted that IRS only calls after the email correspondence has been undertaken at some point. They do not randomly call and audit any individual prior to written communication.
How to reduce the risk of an IRS Audit?
There is no foolproof way of ensuring that the IRS would never audit an individual. However, there are still certain things and aspects that can be implemented by auditors in order to ensure that the overall risk of audit is minimized to a certain level. These steps are as follows:
- Double checking all records before filing: In order to reduce the suspicion level of the IRS agents, it is always best to double check all returns before they are formally fined. Regardless of the fact that IRS does not always end up auditing accounts in case of a mistake, yet incidence of mistakes in the tax filing system often slows down the process, and hence, it might eventually result in IRS taking a closer look in the financial statements.
- Electronic filing: Statistically, e-filing the tax returns is known to result in a better, and an error-free judgement that is free from any errors.
- Always be honest: IRS audit, in most cases, is an outcome of individuals hiding income sources, or vital information in the tax returns. However, it must be noted that there is absolutely no point in hiding anything from the IRS, since they are most likely to eventually find out about it, and therefore, it results in an audit, followed by penalties, if applicable.
Best steps to undertake in case of an IRS Audit
In the case where IRS calls for an audit, there are some best practices that can come in handy for the individuals. It can be seen that there are several different steps that form to be the ideal remedy by the recipients of the audit, so that the audit can be processed properly, without any further hiccups. These steps are as follows:
- Do not freak out: Regardless of the fact that audit can be a daunting process, yet the first step is to understand that it is okay to be audited, and it can be fixed.
- Cooperate as much as possible: Dodging IRS, or avoiding their calls or texts is never the right course of action. In fact, it is important to understand that the only way to fix this issue is to make sure that all information, and all documents that are required by the IRS are provided to them on an urgent basis. It never helps to not cooperate with them. In fact, it only makes things worse, and might eventually lead to more catastrophic results for the individual.
- Know your rights: Once the audit is completed, the IRS may or may not agree with the same bill that was presented earlier. In case an individual disagrees with a particular outcome of an audit, the individual can arrange for a conference with the IRS manager. An appeal can also be filed under the laws of statute of limitations.