It sounds like a cause for excitement: the IRS is auditing the fewest tax returns in years.
But while the official audit rate is down, the real audit rate remains a serious problem for everyday taxpayers.
Staring down an audit with no clue where to begin? You can start by reading these common IRS questions and answers related to audits, the auditing process, and what you can do to make your life easier.
What Do You Need to Know About Audits?
First, a bit of basic housekeeping. It’s hard to weather an audit if you don’t actually know what the process entails.
An audit, in simple terms, is a review of an individual taxpayer or business’s accounts to ensure that all the current tax laws are being followed, that income is correctly reported, and that you’re paying the right amount of taxes.
Basically, it’s the IRS making sure that everything on your taxes is correct. That way, they can ensure they’re bringing in the right amount of money each year to keep the federal government operational.
It doesn’t necessarily mean you’re in trouble. It does, however, mean that your returns fall outside the norms for your group, based a complex combination of criteria.
How Does the IRS Decide Who to Audit?
The IRS doesn’t conduct audits at random. Quite the opposite, in fact.
When you file your return, the IRS checks the information in your return against that of returns from comparable taxpayers–checking your performance against statistical norms.
If it finds that your form falls outside those statistical norms, that’s a red flag for the IRS that there may be something wrong with your return.
If they see a red flag, the return is passed to an experienced auditor, who reviews the return. At this point, the return may be accepted as filed or flagged as questionable based on the auditor’s experience.
If your return falls into the latter category, the auditor identifies the problematic items and forwards it to an examining group, at which point it is reviewed by a manager. The examining group may have experience that pertains to a particular issue in the return, such as your work industry.
Based on that review, the manager either accepts the return as it stands or assigns it to an auditor. That auditor will review the flagged items again and either accept the return as it is or contact you to schedule an appointment.
Why was My Return Selected for an Audit?
If your return was selected for an audit and it reaches the stage where an auditor reaches out to you, you can be sure that the audit is not random.
At this point, your return has gone through at least four stages of review, and at each stage, an auditor has found something problematic in your return that has to be reconciled.
Basically, if your return stands out from the crowd (i.e. your return doesn’t make sense when compared to the returns of taxpayers like you) then the IRS will conduct an audit to make sure there’s nothing suspicious.
To be clear: the IRS isn’t auditing you for the sake of a witch hunt. They know that people make mistakes. When they conduct an audit, their goal is to separate honest mistakes from illegal activities.
That said, some taxpayers are more likely to be audited than others–in particular, people who have a lot of money (over $10 million in income) or none at all, as well as people who file international returns.
How Long Can the IRS Wait Before Auditing?
In general, the IRS can wait three years before auditing you. However, there are exceptions to the rule.
The original three-year time limit can double to six if you omit more than 25% of your income. It also doubles if you omitted foreign income worth more than $5,000.
And if you’ve never filed a return in your life, there is no time limit for the IRS to audit you. The same thing goes for fraud and foreign assets.
That said, most audits begin within a few months after you file your return. In these cases, the IRS freezes refunds. That’s because the IRS has to pay interest on refunds returned late, which means they’re highly incentivized to start and finish these audits quickly.
Audits of this kind normally focus on tax credits, like the child tax credit. If that’s the case with your audit, they’re usually looking to verify information on dependents, filing status, and other return items.
Audits that start within a year are usually mail and office audits related to questionable items on your return. The most comprehensive audits (field audits, when an auditor visits your home or office) start even later. If you’re facing a field audit, bring a representative with you.
Regardless of the type of audit, the IRS will inform you that it is being conducted. They will not inform you by telephone, email, or social media–if you get contacted in this way by someone pretending to be the IRS, report the scam to the IRS immediately.
The IRS prefers to do business the old fashioned way: through the US Post Office.
And if you’re not sure a letter is actually from the IRS? Call them and ask.
Moving Beyond IRS Questions and Answers
Do you see echoes of your own situation in these IRS questions and answers?
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If you need to speak with a tax attorney about your options, use our contact page to get in touch.