Written by AskTheLawyers.com™
Written by AskTheLawyers.com™
Tax Audit Overview
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A tax audit is an examination of someone’s tax return by the Internal Revenue Service (IRS) to verify that a person’s income and deductions are accurate. Tax audits are generally conducted through both random selection, or when there appear to be issues with someone’s tax return. These audits are intended to verify the accuracy of the information contained within a tax return as well as to prevent fraud from being perpetrated. Tax audits can involve fines that vary in amount depending on the severity of the issue. According to the IRS, both people in higher tax brackets and those who report no income are more likely to be audited.
According to statistics from the IRS, they audited almost one million tax returns for 2017, which was approximately 0.5% of all tax returns filed for that year. For 2018 audits, most of them were conducted via correspondence rather than in-person. Whenever a tax audit is predicted to have serious results or involves an in-office or field interview, it’s a good idea to contact a tax attorney to help protect you from any unfair damage.
However, many tax audits actually result in taxpayers receiving a larger refund than they had before. In fact, of the 1,000,000 tax returns mentioned above, almost 30,000 resulted in additional taxpayer refunds, totaling more than $6 billion. If you have questions regarding the likelihood of your tax return being selected for audit, contact a tax professional or attorney.
Some Reasons the IRS May Select Your Return for Auditing
There are a variety of reasons your tax return could be selected to undergo an audit. It can help to understand these reasons in order to better safeguard against them. A simple mistake made when filing your taxes could result in an unnecessary headache down the road and expensive fines. If you predict that your filing your tax return might be particularly complicated
Let’s go over some red flags the IRS looks for when deciding who to audit:
- Calculation errors. Putting the wrong digit here or there on a tax return might not seem like a big deal, but this can result in serious issues with a tax return. It’s a good idea to use a tax prep software or ask for help from a tax preparer if you don’t trust yourself to double and triple check that all the numbers in your return are correct.
- Failing to report income. It can be easy for those who work contract or freelance jobs to forget or even intentionally avoid including this additional income on their tax return. However, the penalties for failing to report this income can be severe. In the case of contract work, many employers will include their payments to you with their own reports to the IRS, so if your return fails to include that amount, you could receive an audit and subsequent fines.
- Claiming inaccurate charitable donations. The IRS allows taxpayers to include charitable donations as a deduction on their tax return. However, including inaccurate or nonexistent donations can result in an audit and subsequent fines.
- Reporting inaccurate losses. This is especially easy for those who are self-employed to do. Writing off personal expenses as business expenses is an easy way to get caught committing fraud. This includes trying to deduct too many business expenses.
- Using round numbers. While it is standard to round up to the nearest dollar when inputting information into a tax return, rounding to the nearest hundred can arouse suspicion and may result in an audit.
There Are Four Different Kinds of Tax Audits
There are a variety of tax audits, varying in purpose and severity. Depending on the type of audit you receive, it might be important to hire an attorney to represent you depending on the consequences at stake. The four different kinds of tax audits include:
- Correspondence audit. This is the most common and least severe kind of audit. This generally includes the filer receiving a letter in the mail requesting further information to verify one or more parts of the tax return.
- Office audit. If an IRS auditor has more questions regarding your tax return, you may be requested to sit down for an interview in an IRS office. The consequences of these audits can be more severe, so it’s a good idea to bring a tax attorney with you.
- Field audit. This is the most serious kind of tax audit. For this kind of audit, the auditor will come to your home or place of work, looking for something specific. It is highly recommended to have an attorney with you at this time.
- Random audit. These audits occur through random selection and the severity can vary depending on what an auditor files. As long as the filer still has access to receipts and other documents listing the amount of income/deductions for that tax year, these audits should be relatively simple to complete.
If you need help with your taxes or are likely to undergo a tax audit, talk to a tax preparer and or tax attorney to ensure that you and your family are as protected as possible from unnecessary damage.