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What Does It Mean To Get Audited By IRS?
The idea of getting audited is a common fear shared by all taxpayers in the United States. Even if you’ve tripled-checked your return, you are probably still a bit nervous when you file it. You should make sure that you’re accurately filling out your tax return, but the odds of getting audited are incredibly low.
If you still feel uneasy about your tax return, it might be a good idea to talk with a tax professional. The experts at Coast One Tax Group can review your tax return before you file it and make sure that you’re not at risk of being audited.
What Is Tax Audit?
An audit is a thorough review and examination of financial records to ensure that the information has been reported and corrected on your tax returns. Every American citizen must file an annual income tax return before Tax Day.
Depending on the nature of your work, the IRS has already received a lot of your financial information before you file. You’re given the opportunity to include various deductions or credits on your return that can lower your tax obligation.
An audit can be triggered if the information that you provide differs from the information that the IRS already has on file. The IRS may want to take a closer look at your financial records to make sure they have the correct information, and that there were no mistakes made.
How Often Are Audits Conducted?
There are a few hundred million people living in the United States, and a vast majority of them are required to file a tax return annually. That’s a lot of returns to process every year, and the IRS isn’t able to review all of them. Instead, they’ve established a method of screening returns to quickly check for any glaring errors that might warrant a closer look.
The total number of audits has steadily fallen over the last decade or so. There were nearly 1.5 million audits conducted in 2010, but less than 510,000 for the fiscal year of 2020. The IRS has also taken more of an interest in auditing tax returns valued at $1 million or more. They are still the minority of tax returns to get audited, but they are more likely to be reviewed now than ever before.
What Triggers An Audit?
If you make less than a million dollars a year, the odds of being audited are pretty slim. The IRS only audited 0.45% of individual tax returns in 2019. In other words, you have a one in 220 chance of being audited.
It’s important to note that those odds are only based on the total number of returns filed. There are several things that you can do when filing that can dramatically increase your odds of being audited.
These are a few of the most common reasons that an audit is triggered:
Every tax return that is filed with the IRS is run through a computerized system called the Discriminant Information Function (DIF). The DIF program will quickly check for potential mistakes or irregularities on your return.
A misspelled name or incorrect social security number might be caught by the DIF, but it probably won’t trigger an audit. Instead, the DIF is looking for issues like duplicate dependents or excessive tax deductions.
The program can compare the returns of other people in a similar tax bracket and look for odd behavior. For example, let’s say that the majority of people in your tax bracket claim $100 in charitable donations. If you were to claim $25,000 then the DIF would almost certainly flag your return and trigger an audit.
Failure To Report
You are required to pay income taxes on just about any amount of money that you receive. Whether you have a W-2 with your employer or work as a contractor, you will be required to pay taxes on your income. Where people make mistakes is by failing to report other income.
Tips, loan forgiveness, gambling winnings, and selling stocks are all examples of income. The IRS expects you to pay taxes on each and every dollar. Failing to report this income could result in you paying fewer taxes than the IRS believes that you owe. The DIF would catch this discrepancy and flag your return for a closer look.
Excessive Deductions And Credits
Using deductions and tax credits is an easy way to lower your overall tax obligation. That’s why they were created in the first place. The problem is that using them when you’re not eligible is illegal and can lead to trouble.
Claiming that you paid $45,000 on mortgage interest would significantly lower your tax burden. However, if you only make $50,000 annually, then it would raise some questions. The same is true for the charitable donation example mentioned earlier. Giving away 85% of your salary to charity would be very difficult for the IRS to believe, and they would want to investigate.
What Is The Process Of An Audit?
Audits can be a very stressful experience to go through, but they’re also a bit boring at the same time. A large majority of audits are conducted through the mail and will result in little to no conversations with the IRS.
The first thing that will happen is the IRS will notify you that they discovered discrepancies in your return and are launching an audit. They will typically send a simple letter claiming that you owe more money than you paid. The letter will include the reasoning behind the claim and the total amount due.
These letters aren’t necessarily an audit, but failing to resolve the outstanding tax can trigger one. If you receive a letter from the IRS saying that you owe them money, it’s probably a good idea to talk with a tax professional about your options.
The IRS might send a different letter that requests specific information relating to your return. This type of letter is what constitutes an audit being launched. You can either send in the information requested to clear your name, admit fault and pay off the balance, or dispute the claim without evidence.
The last option will continue the audit process and could end up with a court date being established. If you dispute the claims made by the IRS, they might perform a field audit or a line-by-line audit. These types of audits are the most dreaded and indicate that the IRS is taking the matter very seriously.
A field audit will mean that an IRS agent will come to your home or request that you go to your local IRS office. They will meet you face to face and discuss the matter at hand while requesting any information relevant to the audit.
A line-by-line audit is extremely rare but can be very consequential if triggered. As the name implies, a line-by-line audit will go through every single line on your return and review the information. The information is used by the IRS to help them improve their auditing process in the future and the taxpayer usually winds up owing additional taxes, fees, and penalties.
Can You Appeal An Audit?
The IRS acknowledges that most taxpayers will disagree with their findings during an audit. As a result, they’ve created the Office of Appeals that is specifically designed to handle claims of disputed audit findings. The goal is to provide an impartial opportunity for taxpayers to plead their case regarding an audit.
Appealing an audit is no small task as you’ll be going up against seasoned veterans of the IRS. Trying to appeal the findings of an audit by yourself would be a grave mistake. Even though the appeal process is free, you should enlist the help of a tax professional, or else you will most likely lose.
The overall process of an appeal is a bit complicated, but these are the basic steps:
- Initiate the appeal. The findings of the audit will provide information on how to appeal it. You’ll need to include specific information that includes what exactly you disagree with, facts that support your disagreement, and a signature under the “penalties of perjury” statement.
- Prepare your case. The appeals officer should respond to your claim within 90 days, and a hearing will be scheduled. You normally have at least 60 days to prepare from the day you submit the appeal request. You’ll need to prepare copies of all relevant information and evidence that supports your claims.
- Present your case. The appeal isn’t as formal as a trial you might see on television. There is no judge, jury, or curious public. You’ll need to present your case to the appeal officer, who will hear your case, review your evidence, and eventually make a ruling. It’s fairly rare to win an appeal, but it has happened before.
Getting audited can be a very stressful and costly experience. Although audits are pretty rare, the IRS is very thorough when they conduct them. If you have been audited, you will most likely end up paying the IRS some money.
The best thing that you can do is talk to a tax expert. The people at Coast One Tax Group specialize in dealing with the IRS and disputing audits. Consulting with these tax professionals can help with the headache of an audit and might save you some money too.