“Audit” is a word that can strike fear into the hearts of taxpayers.
If you have ever received one of their audit letters, you may feel a a rush of anxiety.
However, the chances of an Internal Revenue Service audit aren’t that high. In 2017, the most recent statistics available, show the IRS audited 0.5 percent of all individual tax returns. That’s about one in 200.
Being audited does not necessarily imply that the IRS suspects wrongdoing.
The IRS says that an audit is just a formal review of a tax return to ensure information is being reported according to current tax law and to verify that your information is accurate. Remember, this article is for informational purposes only, and is not a replacement for real-life advice. So make sure to consult your tax, legal and accounting professionals before modifying your tax strategy.
The IRS selects returns for audit using three main methods.
1. Random selection.Some returns are chosen at random based on the results of a statistical formula.
2. Information matching.The IRS compares reports from payers – W-2 forms from employers, 1099 forms from banks and brokerages, and others – to the returns filed by taxpayers. Those that don’t match may be examined further.
3. Related examinations.Some returns are selected for an audit because they involve issues or transactions with other taxpayers whose returns have been selected for examination. There are many sound tax practices that may reduce the chances of an audit.
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Provide complete information.Among the most commonly overlooked information is missing Social Security numbers – including those for any dependent children and ex-spouses.
Avoid math errors.When the IRS receives a return that contains math errors, it assesses the error and sends a notice without following its standard deficiency procedures. Most of these errors are simple arithmetic errors. Check the numbers carefully.
Match your statements.The numbers on any W-2 and 1099 forms must match the returns to which they are tied. Those that don’t match may be flagged for an audit. Many taxpayers received multiple 1099s. It is easy to miss an entry, again check the work. There are piles of documents in your tax files, it is easy to miss one.
Don’t repeat mistakes.The IRS remembers those returns it has audited. It may check to make sure past errors aren’t repeated.
This one happened to me about 30 years ago.
I was audited four years in a row and the result of each audit was virtually no change. When I received the IRS letter for the fifth year in a row, I had my CPA respond. The result was that I received an apology letter and the notification of audit was rescinded.
Keep complete records.This won’t reduce the chance of an audit, but it potentially may make it much easier to comply with IRS requests for documentation.
Audits are no fun. The typical reaction is to worry. Most of the time, audit letters can be dealt with quickly and without worry.