There are certain things that will send a chill down anyone’s spine. The sound of long fingernails scratching a chalkboard is one. The surprise of suddenly walking up on a large snake, spider, or insect is another. Then there’s the phrase “IRS tax audit,” which sends even the most organized and disciplined individual into a tizzy.
If you find yourself faced with an IRS tax audit, it’s important that you prepare accordingly and make smart decisions to improve your chances of coming out without any negative marks or consequences. The question is, how?
What is an IRS Tax Audit?
A tax audit is nothing more than a process the IRS uses to determine whether a tax return is substantially correct. It’s an official procedure that always leads to one of three outcomes. Either the taxpayer owes the government more money, the government owes the taxpayer more money, or the auditor accepts the original tax return as it was filed.
While the news seems to be full of stories where taxpayers go to jail after audits reveal mistakes or wrongdoings, the fact is that very few people ever go to jail in the wake of an audit. These are the outliers and, in almost every single case, they understood exactly what they were doing and were aware of the risks they faced. For the average taxpayer, an audit is nothing more than a clerical process that’s used to verify accuracy and ensure integrity.
According to the IRS, audits aren’t very common. In 2017, just 0.6 percent of all individual income tax returns were audited. And for individuals earning less than $200,000 per year, the likelihood of being audited is even lower. However, this doesn’t give taxpayers the freedom to claim any and all tax credits and deductions.
While some tax audits are random, many are triggered by suspicious activity. The most common red flags include:
- Math errors. The IRS doesn’t like mistakes. If you end up writing a six instead of a nine or checking a box on line 18 instead of line 19, you could get hit with some fines. Certain errors will automatically trigger an alarm in the system that says something is wrong. You can avoid math-related audits by double- and triple-checking your work.
- Failure to report income. Don’t think you can dupe the IRS into thinking you’re earning less than you really are. The IRS already has all of your W-2 and 1099 forms on file. If you fail to submit some of your earnings or try to manipulate the numbers, they’ll see what’s happening.
- Suspicious deductions. The IRS is fine with taxpayers taking deductions, but eyebrows will be raised when deductions are viewed as excessive or suspicious. Making too many contributions to charities, for example, may cause the IRS to take a second look and verify that the numbers are accurate.
- Excessive business losses. Plenty of businesses lose money. However, if you consistently file Schedule C’s that lose money, the IRS will eventually get curious and verify that you aren’t just sheltering your income from taxes.
- Lots of round numbers. If the IRS sees lots of round numbers on a tax return, they’re going to question the accuracy of what you’re telling them. While it’s okay to round up to the nearest dollar, don’t round $19,600 up to $20,000 or $454 to $500. Stick with the actual values to avoid complications.
How You Know You’re Being Audited
People often ask the question, how will I know if I’m being audited? The answer is actually quite simple: You’ll receive an official notice in writing. You’ll likely receive a letter and an email. The tone will be professional and matter-of-fact, not threatening or accusatory.
As expert Susannah Snider writes, “If you receive a text, email or phone call purporting to be from the IRS and threatening to arrest you if you don't pay taxes, you're almost certainly dealing with a scammer, experts say. A real auditor is not going to text you, they're not going to email you, they're not going to threaten to throw you in jail.”
The IRS has the ability to initiate three different types of audits. The first is a correspondence audit that’s conducted in writing and involves no face-to-face time with an auditor. Then there’s an office audit where the individual is required to meet an auditor in person at an IRS office. Finally, there’s the field audit. While far less common than the other two, a field audit requires the auditor to come to your place of business to manually inspect files and records.
Preparing for Your IRS Tax Audit
If you’re facing an IRS tax audit, it’s important that you respond with poise and purpose. Here are a few suggestions to help you handle the audit process:
1. Stay Calm
The first step is to remain calm and avoid freaking out. Most notices the IRS sends out can be handled relatively easily and without any excessive pain or friction. If you have an accountant or tax prep professional on your side, forward the letter to them and they should be able to address the situation fairly easily. Even if further communication is required, a tax audit is almost always less painful than people realize.
2. Organize Your Records
Hopefully you already have most of your financial records organized. (It’s a good idea to have a file in your filing cabinet dedicated to each year’s tax return. These files should be saved for a minimum of six years.) If you aren’t as organized as you should be, now’s the time to gather all documentation, records, and receipts so that you’re able to enter into the audit process as organized as possible.
3. Comply With Requests
By law, you are required to comply with the IRS during a tax audit. A failure to do so could lead to further consequences, penalties, or even jail time. So while you may be frustrated by the inconvenience of an audit, be sure you comply with all requests in a timely and professional manner. IRS auditors are humans, too. If you’re disrespectful, shady, or arrogant, don’t expect them to do you any favors.
4. Be Honest, Yet Calculated
While you need to be professional and respectful of your auditor, don’t get too close. There’s value in knowing when to remain quiet.
“Be forthcoming with information, but only answer questions that are directed to you. Never volunteer extra information,” Bankrate advises. “Don’t be surly or impatient, but also, don’t be fearful. Be confident that your tax return was correct and that you have records to prove it.”
5. Hire a Professional
You have the right to represent yourself in an IRS tax audit. You also have the choice to hire a professional to represent you on your behalf. If you don’t feel like you’re up to the task, it would be a wise investment to hire a professional. It’ll cost you a pretty penny, but the process will likely be much smoother.
Get Your Taxes Done Right
An IRS tax audit is never something you want to go through again. Even if you do come out without any scratches, it’s a painstaking, frustrating process that eats up your time, causes stress, and temporarily handcuffs your freedoms. The best way to avoid a future tax audit is to get your tax return prepared by a professional.
With Taxfyle, you answer a few simple questions about your finances, submit required information, upload some files, and then sit back and wait. One of our qualified tax preparation professionals will handle all of the hard work and you’re simply left to review and sign. Contact us today to learn more!