How to Minimize the Risk of an IRS Audit

The IRS did not respond to questions regarding specific details of its auditing process, including its total number of audits. When Natassia Smick, 28, filed her family’s taxes in January, she already had plans for the refund she and her husband expected to receive. And she was pregnant with their second child, so there were plenty of extra expenses ahead. If you’re facing an audit, the best approach is to understand the process, why your return was audited, what your rights and responsibilities are, and how you can appeal the findings. Just hearing those words can send fear through even the most honest of taxpayers. But it happens to many people, even if they’ve done their best to get their taxes right.

Returns that are found to have a high UIDIF score (i.e. the likelihood of unreported income) and a high DIF score may be selected for examination. The IRS formulas used to calculated UDIF are secret, but it is commonly thought that the IRS uses statistical comparisons between returns to determine UIDIF potential. Each year, the IRS processes around 261 million tax returns.

Credits & Deductions

In addition to excessive business expenses, unnecessary deductions can trigger an audit. For example, claiming 100% of a vehicle for business use for your sole vehicle could raise a red flag. If the IRS suspects you’ve filed excessive deductions for business expenses, you could get audited.

• Most taxpayers don’t know what being audited by the IRS entails and usually don’t know what to do if they are audited.
• While there’s no way to eliminate the risk, there are things you can do to minimize the chances of being audited.
• Aside from filling out forms, collecting your receipts from the past year and ensuring you’re doing everything correctly, many people fear that they will do something wrong and get audited by the IRS.
• Examinations of documents are conducted either in mail or in a taxpayer’s home, business, or an accountant’s office.
• Tax returns selected by the IRS for an audit have some burning questions that the manual reviewer has flagged.
• According the the IRS’ “The Right to Finality,” taxpayers have the right to know when the IRS has finished an audit.

Keep in mind the IRS auditor has gone through the trouble of drafting and issuing an audit report and because of all the attachments and schedules with it, the auditor is less likely to change their position. As the IRS notes, the purpose of a correspondence audit is to resolve tax problems quickly and easily through correspondence and/or by telephone. The type of IRS audit tends to reveal much about its purpose and the overall strategy of the Internal Revenue Service. You can find more information about extending a statute of limitations in Publication 1035, Extending the Tax Assessment PeriodPDF, or from your auditor.

IRS Audits

It also gives the IRS time to complete the audit and provides time to process the audit results. Also, don’t bring previous business or individual tax returns unless the auditor specifically requests them. Although many people believe that affluent individuals are more likely to be audited, that is not always true. In fact, 256,708 audits in 2019 were conducted on individual tax returns where the Earned Income Tax Credit – a benefit for lower-income individuals – was claimed.

The IRS has a series of standard guides for auditors to use. Reviewing these guidelines will make you better equipped for the actual audit. Some auditors may try to arrange a meeting at your place of business or home.

Related tax terms

Applies if you file your tax return late or fail to pay taxes owed on time. The interest depends on how much you owe in unpaid taxes and the precise timing of the underpayment. One of the easiest ways to prevent your company’s audit from taking an extended amount of time is by ensuring you keep your business records and financial statements organized. By keeping your documents organized, you can avoid the risk of an audit in the first place. For example, just because you disagree with the results of your audit does not mean your audit is over. Once you complete your audit, you will remain in contact with your auditor as you may file an appeal which can extend the process.

But advocates for taxpayers say the IRS makes the situation needlessly worse. Virtually all the EITC audits are conducted by correspondence, and the computer-generated letters are far from simple. A survey by the Taxpayer Advocate Service found that more than a quarter of EITC recipients who were audited didn’t even understand that they were under audit.

How do I know if the IRS received my response?

The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. Although these are some of the most popular myths, experts say plenty of other misguided beliefs about audits run rampant, some even with their own regional flavor. The bottom line is to understand what the process is all about. Jensen said the IRS has ramped up the number of audits it does in response to the country’s economic woes. That means people should not think they’re in the clear if they do not earn a lot of money.

The IRS will notify you if your business qualifies for any audit by mail or an in-person interview. All initial contact will take place in the mail, and the letter you receive will include all necessary details, like contact information and filing what is an example of cost unit instructions. The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice.