Most taxpayers cringe at the possibility of an IRS audit. WorldWideWeb Tax reports, however, that on average the IRS audits only 1.5 percent of all taxpayers each year. An audit typically is triggered by a red flag in your income tax return. Unless you are suspected of committing tax fraud or make a habit of claiming above-average business expenses as itemized deductions, you're not likely to face an audit.
Examining Tax Returns
Each year the IRS compares selected tax returns against a sample of similar returns. Some of the situations that can flag a tax return for audit include self-employment, not reporting taxable income, making mistakes on your return, and claiming too many deductions for your level of income. After an auditor reviews the selected return, it is either accepted or forwarded to an examining group for further scrutiny if the auditor has questions. Upon review, the group’s manager either accepts the return or assigns it to another auditor, who examines the return again. Options available to that auditor include accepting the return as filed or contacting the taxpayer by telephone or mail to resolve the problem.
IRS National Research Program
The National Research Program provides the IRS with statistics that it uses in its audit selection system. NRP reporting compliance studies provide the IRS with data that allows the agency to conduct more efficient audits. The IRS uses research from the NRP studies to help detect under-reported income and deductions and credits disproportionate to a taxpayer’s income. Updates to the program seek to identify changing patterns of noncompliance so that the IRS audits fewer taxpayers who file correct returns.
Selecting Returns for Audit
Certain circumstances increase your chances of being audited by the IRS. For example, failure to report taxable income such as dividends or interest you earn on a savings account can flag your return for audit. The IRS picks up on the discrepancy when it compares your tax return against Forms 1099 reporting income. Your return may also be selected for audit if the amounts of itemized tax deductions you take are more than the IRS averages for your income level. Additionally, the IRS may take a closer look if you are self-employed and take excessive business deductions or deduct home office expenses on your return.
Preparing for Audit
If you hear back from the IRS, it doesn’t necessarily mean that you are in for a full tax audit. Making an unintentional math error or having a line item that doesn’t agree with the documentation you’ve provided is often cleared up by a mail audit. Hire a tax attorney or CPA to represent you if the IRS intends to conduct a full audit. Gather all of your tax records, including bills, receipts, Forms W-2, Forms 1099 and several prior years’ tax returns. During the audit, stay calm, be polite and answer all questions honestly. If you have the records to prove that the tax return you filed is accurate, you shouldn't get upset. In fact, in some cases, an audit proves that the IRS owes the taxpayer money.
- Jupiterimages/BananaStock/Getty Images