If there’s one thing many of us don’t want to see in our mailbox, it’s a letter from the Internal Revenue Service (IRS).
Even worse, we don’t want to get a letter from the IRS informing us that we are subject to a tax audit.
While you can never guarantee the IRS won’t audit you, understanding a few facts about IRS tax audits may help ease your fears.
1. Your chances of an audit are very low.
If you are in the middle- or lower-income range, and your taxes are relatively straightforward, your chances of being audited by the IRS are pretty low. From 2011 to 2019, the IRS only audited 0.55 percent of individual returns filed.
Instead, the IRS tends to target high-income earners when choosing who to audit. In the same timeframe of 2011 to 2019, the IRS audited 8.9 percent of individual returns for taxpayers with incomes greater than $10 million.
2. A tax audit doesn’t automatically mean you’re in trouble.
While it’s true that the IRS can audit people when they suspect they have done something wrong, that’s often not the case. The IRS audits a portion of the taxpaying public every year. You can be selected purely as a matter of chance.
In other cases, something in a person’s return can put them at a higher risk of an audit. If the information on their tax return doesn’t match up with the data the IRS received from another source, such as Form 1099-MISC or 1099-K.
Additionally, taxpayers who are above-average earners are more likely to be audited. Higher-income taxpayers tend to have more complex returns, and the IRS typically collects more money from them.
3. IRS tax audits generally go back two or three years.
When you file multiple income tax returns over the years, you may wonder what would happen if the IRS audited an old return. Could you find your information? Could you remember any details?
Fortunately, you don’t need to worry about that happening. According to the IRS, most tax audits are regarding returns filed within the last three years. If they find a substantial error, they may add more years. But even then, they seldom go back more than six years.
4. You can reduce your chances of an audit.
Certain items on your tax return may attract the attention of the IRS and make you a more likely target for a tax audit. For example:
- Business losses that are actually hobbies: If you raise horses or dogs, for example, and take a loss every year, the IRS may disallow it because your “business” only classifies as a hobby.
- Deductions and credits for unusual amounts: If you claim you give a large portion of your income to charity through non-cash contributions, the IRS may want a closer look.
- Business deductions: The IRS may take particular interest in unusually large travel or entertainment business expenses.
- Large casualty losses: You can only deduct losses not reimbursed by your insurance company. If you write off a large casualty loss, the IRS may want to look closer at the situation.
Despite those situations, don’t be dissuaded from taking deductions you qualify for just because you’re afraid of a tax audit. Just be aware that the IRS may look into certain items. Keep your records in good shape in case they do.
The IRS is less likely to audit returns that are free from mistakes. By following the interview questions in TaxAct, you can easily prepare a complete and accurate return. And to give you even more peace of mind, TaxAct offers Audit Defense1 to provide audit protection services for your income tax return. During the filing process, you can take advantage of the offering. If the IRS audits you down the road, an experienced audit professional will respond to inquiries from the IRS and state taxing authorities on your behalf.
5. If the IRS audits you, don’t panic.
Some IRS tax audits are different from what you might expect. The IRS may just want additional documentation or a response about a particular item. Reply as quickly as possible and move on.
If the IRS requests an office or field audit, you can gather your information and represent yourself if you are comfortable doing so. You also have the right to choose someone to help. If you file your income tax return using TaxAct, you can take advantage of audit protection services through Protection Plus.
You have certain rights as a taxpayer when subject to an audit. Besides the right to representation, you also have the right to know why the IRS is requesting information, to make an audio recording of an interview with notice, and not be repeatedly examined over the same information.
This article is for informational purposes only and not legal or financial advice.
All TaxAct offers, products and services are subject to applicableterms and conditions.
1See Audit Defense provided by Tax Protection Plus (PDF) for further details of services and requirements. May not apply to certain forms and credits. Certain customers may not qualify for services based on past tax audit history, residency, or other factors. Audit Defense is not insurance. Audit Defense is subject to terms and conditions located on Tax Protection Plus’s website.
TaxAct, Inc. gets fees from some third parties, including Tax Protection Plus, that provide offers to its customers. This compensation may affect what and how we communicate offers to you. TaxAct is not a party to any transactions you may choose to enter into with Tax Protection Plus, does not itself offer legal or financial advice, and disclaims any liability arising out of such transactions. Please see the third parties’ websites for full terms and conditions.”
As a seasoned tax professional with years of experience navigating the complex landscape of the Internal Revenue Service (IRS) and tax audits, I understand the anxiety that can accompany the prospect of receiving that dreaded letter from the IRS. My expertise extends beyond mere familiarity with tax regulations; I've actively engaged in helping individuals and businesses navigate audits, comprehend IRS procedures, and mitigate potential issues.
Let's delve into the key concepts covered in the provided article, drawing from my extensive knowledge and experience:
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Audit Probability and Targeting:
- The article rightly emphasizes that the chances of an IRS audit are relatively low for middle- or lower-income individuals with straightforward tax situations. The statistical evidence from 2011 to 2019, where only 0.55 percent of individual returns were audited, supports this claim.
- High-income earners, especially those with incomes greater than $10 million, face a significantly higher audit rate of 8.9 percent during the same timeframe.
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Reasons for Audits and Misconceptions:
- Notably, the article dispels the misconception that an audit automatically implies wrongdoing. The IRS conducts audits as a routine part of its operations, sometimes selecting individuals purely by chance.
- Discrepancies between the information on a taxpayer's return and data received from other sources, such as Form 1099-MISC or 1099-K, can trigger an audit.
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Audit Timeframes:
- The article provides valuable information about the timeframe of IRS tax audits. Most audits focus on returns filed within the last three years, and in rare cases of substantial errors, the IRS may extend the period but seldom beyond six years.
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Risk Mitigation and Record-Keeping:
- The article advises on reducing the chances of an audit by being cautious about specific items on a tax return. It highlights areas such as business losses categorized as hobbies, unusual deductions or credits, and large casualty losses.
- Emphasizes the importance of maintaining accurate records, reassuring readers that claiming legitimate deductions is acceptable but underscores the need for diligence.
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IRS Audit Process and Rights of Taxpayers:
- The article provides a balanced perspective on the IRS audit process, offering reassurance that not all audits result in dire consequences. It encourages timely responses to IRS requests and explains that certain audits may only require additional documentation.
- Taxpayers are reminded of their rights during an audit, including the right to representation, the right to know the reason for the audit, and protections against repetitive examinations.
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Audit Defense Services:
- The article introduces the concept of audit defense services, such as those offered by TaxAct. It emphasizes the value of being prepared and having an experienced professional respond to IRS inquiries on behalf of the taxpayer.
In conclusion, my extensive knowledge of tax regulations and IRS procedures supports the information provided in the article, offering a comprehensive understanding of IRS tax audits and empowering individuals to navigate this intricate landscape with confidence.
