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Do the words “IRS audit” strike fear in your heart?
Perhaps dread of an audit affects how you file your federal income tax return. If so, you’re not alone.
Fifty-nine percent of taxpayers say their fear of being audited helps keep them honest when filing their federal income taxes, according to a 2014 Taxpayer Attitude Survey from the IRS Oversight Board. To be fair, so does their personal integrity (92 percent). A recent Credit Karma Tax® survey indicates most Americans value honesty when filing their taxes, with just 6 percent of respondents saying they had ever knowingly cheated on their income taxes.
Of course, sometimes your fears are irrational. You can be totally honest on your tax return, and diligent about filing it and paying your taxes on time, and still fear being audited by the IRS.
The good news is, your fears probably far surpass your actual chances of being audited.
Truth in numbers
Typically the IRS audits less than 1 percent of all tax returns filed in a fiscal year.
For example, in the 2015 calendar year, the IRS audited 0.6 percent of all individual tax returns filed and 1.1 percent of corporate income tax returns, excluding S-corp returns.
To break it down further, while the IRS received nearly 193 million individual income tax returns that year, it examined (audited) slightly more than a million of them. During the 2016 fiscal year audits, more than 70 percent were handled through correspondence. About 23.9 percent got “field” examinations — the dreaded face-to-face audit.
What’s more, most audits happen to high earners. People reporting adjusted gross income of $10 million or more accounted for nearly 19 percent of audits in fiscal year 2016. Taxpayers reporting AGI of $5 million to less than $10 million accounted for nearly 11 percent of audits.
The bad news (mostly for those audited) is that only 19 percent of those examinations ended in the IRS making no change to the taxpayer’s return, meaning they didn’t have to pay any more to the IRS for that year’s return.
For those who did wind up owing more, the average additional amount they had to pay was $6,622 for those whose audits were handled via correspondence, and $18,977 for those who went through a field audit.
So while your chances of an IRS audit may be slim, if you do get audited, you could end up owing more federal income tax — and it could be a significant sum. Let’s take a look at some issues that could trigger an audit.
Possible reasons for an audit
The IRS could select your return for audit for multiple reasons. They note that being audited doesn’t necessarily mean there’s a problem with your return, or that you have been dishonest.
Reasons your return could be audited include:
- A computer scoring program assigns a numeric score to each individual and some corporate tax returns after they have been processed. If your return is selected because of a high score under this program, an examination of your return will probably result in a change to your income tax liability.
- Information on third-party documents, like a W-2 or 1099, doesn’t match what you’ve reported on your return.
- An item on your return is questionable.
- Information from sources such as public records, newspapers or individuals indicates potential noncompliance with tax laws or inaccuracies on your tax return. The IRS assesses the reliability and accuracy of such sources before acting on the information from them.
Reducing your risk even more
Of course, while making mistakes on your tax return might not result in an audit, errors can mean the IRS needs to take a closer look at your return. Plus, mistakes can slow down receipt of any refund you may be owed.
Nothing can guarantee you never get audited. However, you can take steps to reduce errors on your tax return.
Filing electronically is the top recommendation from the IRS for how to reduce errors on your tax return. States like e-filing, too. In fact, Indiana’s Department of Revenue offers some statistics that are a case study for the advantages of e-filing.
- In 2013, 78 percent of Indiana taxpayers e-filed, and 98 percent of those e-filed returns were free of any errors.
- Up to 20 percent of paper returns filed in the same year had errors, including math errors, over-claiming of deductions and credits, and omitted documents, such as W-2s.
Free online tax preparation services like Credit Karma Tax® help reduce math errors, ensure deductions and credits are within allowable limits, and identify items on your return that could cause the IRS to reject it. Plus, services generally won’t allow you to file without including all required information.
Audit survival 101
Getting audited will never be fun, but if the worst happens, you can survive it.
First, be aware that the IRS generally tries to audit returns in a timely manner — usually within two years of filing. However, they can include the previous three years’ worth of returns in an audit, although a substantial error might make them look farther back. Usually, six years is the maximum.
If your return has been selected for audit, the IRS will first notify you with a letter that will tell you what you need to do to respond. They will not call, email or text you to notify you of an audit. They’ll manage the audit either through the mail or an in-person interview.
If the IRS needs specific documents from you to conduct the audit, they’ll request them in writing. You can send physical documents to them through the delivery service of your choice, but the IRS recommends you get some type of delivery confirmation from the service. This will help ensure the IRS gets what you’re sending them.
Feel like you need more time to respond to a letter request for information? The IRS can generally grant an automatic 30-day extension, but you’ll need to send your request via fax to the number on your IRS letter, or mail it to the address on the letter. For in-person audits, you can communicate your request for an extension to the auditor handling your case.
How long your audit takes depends on multiple factors, including the following:
- How complex the issues are
- How quickly you can provide any information requested
- Your and your auditor’s availability for scheduling any necessary in-person meetings
- Whether you agree or disagree with the IRS’ findings
After the audit is done, the IRS may decide that it doesn’t need to make any changes to your tax return and tax bill. Or it may decide that changes are needed. You may agree with those changes and make arrangements to pay any additional tax you owe. Or you may disagree.
When you disagree with the audit results, you can ask for a conference with an IRS manager or request mediation. You may be able to file an appeal if you still have time to do so under the statute of limitations.
You have rights
Interestingly, it seems most taxpayers trust the IRS to do the right thing. According to the 2014 Taxpayer Attitude Survey, 61 percent of taxpayers say they trust the IRS to fairly enforce tax laws. Trust in the IRS is even higher among young people, with 73 percent of 18- to 24-year-olds and 65 percent of 25- to 34-year-olds saying they trust the IRS.
It may be comforting to know you also have rights when it comes to paying taxes and facing an audit. The Taxpayer Bill of Rights explains your rights. Elements of those rights that could apply when you’re facing an audit include the following:
- Clear explanation of tax laws, IRS procedures, IRS decisions about your tax accounts and outcomes of those decisions.
- Prompt, courteous and professional treatment from the IRS.
- Clear and understandable communications.
- The opportunity to challenge the IRS’ position, and to appeal their decisions, including taking the case to court.
- Representation by either yourself or an authorized representative of your choice
The chances of an IRS audit may be very low. However, if you still fear the possibility of being audited, you can take steps to ensure your tax return is as trouble-free as possible. E-file to reduce the risk of errors, double check everything on your return before filing, and be sure to file and pay any tax you owe by the filing deadline.