Even though audit rates have declined in recent years, there is always a chance you will receive an audit notice from the Internal Revenue Service (IRS). An audit notice means the IRS wants to take a closer look at your financial information. The agency will try to verify the information on your federal tax returns and ensure you paid the proper amount of tax.
The IRS conducts audits of taxpayers who are suspected of fraud, may have made errors in their paperwork, or are part of a target group subject to greater scrutiny. However, the subjects of some audits are chosen randomly. The following sections discuss actions a taxpayer can take to avoid an audit and what to do if you receive an audit notice.
Avoiding an Income Tax Audit
The IRS may choose to audit tax returns because they raise red flags, are randomly selected, or include information that invites closer scrutiny. Sometimes an audit stems from a combination of these reasons. The IRS tries to make it difficult to predict who will be audited to prevent those who commit fraud or otherwise cheat on their taxes from developing a system that avoids them.
While there are no guaranteed methods for avoiding an IRS audit, you can reduce your risks by being honest and not making errors on your return. Some common issues that can result in an audit include math errors, omitting income from your return, claiming your personal expenses as business expenses, and other types of errors and fraud that reduce your tax liability.
A 2022 report by the U.S. Government Accountability Office found that the IRS is more likely to audit the individual income tax returns of people making less than $25,000 a year and high-income taxpayers earning more than $500,000 annually. It also found that taxpayers claiming the earned income tax credit (EITC) were more likely to be audited.
Fortunately, there are some things you can do to reduce your audit risk. Filing taxes using a computer helps reduce math errors and improves legibility. Using a tax professional like a tax attorney or a certified public accountant (CPA) helps ensure that you comply with complicated regulations. This is especially crucial when a small business is involved. Filing your taxes on time and paying your tax bill can also keep you from drawing the IRS' attention.
How the IRS Picks Taxpayers for Audits
Just because you received an audit letter does not necessarily mean the IRS thinks you've done something wrong. The IRS chooses to audit your returns for a tax year based on random selection computer screening or related examinations. It uses these criteria for individual taxpayers, small businesses, and the self-employed.
Some people believe filing an amended return to correct an error in a previously filed return makes them more likely to be audited. But the IRS maintains that amended returns are no more likely to be audited than others. Additionally, the IRS says that claiming a tax refund will not make you more likely to be audited.
Once you have been selected for an audit, you will be notified by mail. The IRS does not contact taxpayers by phone, email, or text messaging.
Random Selection Computer Screening
Some returns are selected for audit because a computer has compared them to IRS data taken from similar returns and found discrepancies. The similar returns, referred to as "norms," are selected using a statistical formula. The information collected on the norms comes from audits of a random sample of returns selected as part of the IRS' National Research Program. The IRS uses this information to update the data it employs to select returns.
The IRS will sometimes audit returns because the taxpayer was involved in transactions with other taxpayers who are under audit. These related examinations often involve the taxpayer's business partners and investors.
How Are Audits Conducted?
IRS examiners handle audits in two ways: correspondence audits conducted by mail and in-person interviews. Most audits are conducted by mail. They'll begin with the IRS sending you a letter requesting more information about items on your tax return. They often ask you to provide records of your income, expenses, and itemized deductions. If you are the subject of a mail audit, you can always request a face-to-face meeting with an IRS examiner.
The in-person interviews will either be field audits or office audits. Field audits are conducted in the taxpayer's home, place of business, or the offices of their lawyer or accountant. Office audits are conducted in an IRS office.
How Far Back Can an Audit Go?
In most cases, the IRS has three years from the date a return was filed to conduct an audit of the reported information. However, in cases where the taxpayer made a substantial error, the IRS will have six years.
The IRS can also ask a taxpayer to give it more time to conduct an audit if it can't be completed within the required time frame. This usually happens when the taxpayer needs the time to produce additional records to support their claims. If the taxpayer does not give the IRS more time, the examiner will make a determination of whether the taxpayer must pay additional taxes and penalties based on the incomplete information they have.
What to Do if the IRS Audits You
If you are selected for an audit, there are ways to reduce your exposure to additional taxes and penalties. One important step is to research the tax law as it pertains to the type of audit the IRS will conduct. This research may involve consulting with a tax attorney or other tax professional.
It may also help to review the Taxpayers' Bill of Rights so that you better understand your position. Even while an audit is being conducted, you are allowed to request a recess to consult with your representative.
It is important to avoid rushing and making mistakes when you are being audited. When you are responding to IRS inquiries, it can be better to ask for more time to organize and present your documents and records than to submit poorly organized material or fail to support your claims.
The IRS must complete the audit within three years of the tax return's filing unless it's investigating tax fraud or significant underreporting of income. It is often better to meet with an examiner at an IRS office for an audit instead of meeting with them in your home or office. You should also avoid giving the IRS more information than it has requested.
Finally, you should understand that less than 25% of taxpayers who are audited avoid paying additional taxes. That means it is usually more productive to focus on working with an examiner to limit the amount you owe rather than wasting your energy trying to eliminate your tax payment entirely.
Representation During Audits
You do not need to undergo the audit process alone. Several types of tax professionals are allowed to represent taxpayers during the audit and appeals process. These professionals must follow the IRS rules for representation. They include tax attorneys, CPAs, and enrolled agents who have been certified to practice before the IRS.
What if You Disagree With the Audit's Results?
If the IRS concludes its audit, and you disagree with the results, you still have options. One of those options is to request an appeal from the IRS Independent Office of Appeals, which was set up to resolve tax disputes without litigation. Additionally, a taxpayer who disagrees with an IRS decision can always file a petition with the U.S. Tax Court or any other federal court.
Additional Questions? Contact a Tax Lawyer
If you have received notice that the IRS is planning to audit your tax returns and are unsure of how to proceed, a local tax attorney can help. A tax attorney is a tax pro who understands the audit process. They will ensure that you are prepared to meet with IRS examiners and that your rights are protected.
Learn About IRS Audits
You Don’t Have To Solve This on Your Own – Get a Lawyer’s Help
Meeting with a lawyer can help you understand your options and how to best protect your rights. Visit our attorney directory to find a lawyer near you who can help.