Good news! The number of tax audits the IRS does each year is going down.
Unfortunately, you still have a 1 in 160 chance of being audited by the IRS. No one expects that their tax return will be audited, and finding out that you’re being audited is an incredibly stressful thing.
As much as we throw around the concept of people being audited by the IRS, the audit process itself seems to be shrouded in mystery. How do they choose who they audit? And how does a tax audit work?
An IRS audit doesn’t have to be a mystery. Read on to learn everything you need to know about it!
1. Something in Your Tax Return Triggered the Audit
When you think of someone getting audited by the IRS, it probably brings to mind a very wealthy person who uses lots of loopholes to get out of income tax liability. While that certainly does happen, tax audits also happen to everyday people for a wide variety of reasons.
In fact, tax audits can be triggered by minuscule things like math errors. That’s right, accidentally adding an extra zero on a line or transposing numbers on your return is enough to trigger an audit. If the IRS finds you made a math error, even an unintentional one, you’ll still have to pay the associated fines.
Tax audits can also be triggered by things like failing to report income. If you’ve received a W2 or 1099, you can bet the IRS has it, too, so there’s no use in trying to hide it.
Other common triggers include home office deductions and too many round numbers on your 1040 form.
How does the IRS find these items in your return when they have to process millions of audits each year? The most common way is through the use of computer scoring programs that identify potential issues.
2. Notification Letter
The first step of the audit process is a notification letter alerting you to the fact that you are being audited. The IRS will never inform you of an audit by telephone or email.
The notification letter will detail everything you need to know to get the audit process started. It tells you why you have been selected for an audit and then gives you important instructions to follow in order to comply with the audit. The letter contains a deadline to reply to the IRS about your audit, but the IRS will grant you an extension of up to 30 days in the event you need additional time.
3. Tax Audit Via Mail
The IRS conducts tax audits in two different ways: via mail and via in-person interviews. Audits conducted via mail are generally for smaller errors, such as transposed numbers. The majority of tax audits are done via mail and are known as correspondence audits.
If you receive notice of a correspondence audit, then the IRS may request additional documentation, or they may have some questions about the return. These types of audits generally require you to mail in the responses to the questions or the additional documentation, and you’re done.
4. In-Person Interviews
For tax returns that raise a lot of red flags with the IRS, in-person interviews are more likely to be required to sort out the issues with your return. You will need to travel to your closest IRS office for one or more interviews.
The IRS will direct you to bring along any receipts or documentation to the interview. You do not need to go to the tax audit on your own — you are welcome to bring along an accountant or tax attorney as a representative.
In fact, if you’ve been selected for an in-person tax audit, it is in your best interest to retain representation long before you step foot in the IRS office.
5. Your Tax Return is Verified
There are three possible outcomes from an IRS tax audit.
The first, and best, outcome is that the IRS processes all your paperwork and finds that your original income tax return was correct. This means you don’t owe any additional taxes, and you’re not subject to penalties or interest. Unfortunately, outcomes like this are rare.
6. Your Tax Return is Amended
The second outcome is that the IRS concludes after going through your paperwork and interviews that your original tax return was not correct. Findings like this can work out in your favor, and you could receive a refund, but it also could result in you owing additional taxes to the IRS.
You would then be required to pay or set up a plan to pay any taxes that the IRS says you owe. You would also pay applicable penalties and interest charges.
7. You Reject the IRS’ Conclusions
The final outcome is an offshoot of the second outcome — the IRS finds that your original tax return was incorrect, and thus you owe additional taxes plus penalties and interest. But in this outcome, you challenge the IRS’ determination.
You would then schedule an in-person meeting with a manager from the IRS. You will want to come to this meeting prepared with all the necessary documentation to prove your case. Following this meeting, the IRS will either accept or amend your original tax return.
Audits Happen, Protect Yourself with the Best
There’s no one reason why people are selected for audits. And, accordingly, there’s no one way the IRS conducts a tax audit. The best thing you can do in this situation is to hire a tax defense attorney.