Receiving an IRS audit notification
is a stressful event for any taxpayer. There are so many variables in most tax returns that it may not be clear what triggered the audit and what you will need to review with the IRS.
What is an IRS audit?
Briefly, an IRS audit is a detailed review of a tax return to ensure that all information is accurate and in compliance with tax laws. It can be a straightforward process or more complex, depending on the issues involved, but knowing your rights and obligations and working with a tax professional if needed can help navigate the process. Audits can be conducted through the mail, in the IRS office, or at the taxpayer’s home, business, or accountant’s office. The type of audit depends on the complexity and specific issues involved.
How does the IRS choose who to audit?
The odds of an audit by the IRS are not entirely random. Certain factors or “triggers” can potentially attract the attention of the IRS and increase the likelihood of an audit. Understanding these triggers can help you navigate your tax filing process with more confidence and ease. Here are the top five audit triggers as per IRS statistics:
- Errors in Filing: Any errors in your tax returns, like mathematical errors, missing or incorrect social security numbers, or discrepancies in income reported can trigger an audit. The IRS reported that about 2.1% of individual tax returns with apparent errors were audited in 2022.
- Inconsistency in Reported Income: The IRS matches the income reported on your tax return with the information reported by your employer, clients, or financial institutions. Any discrepancy can lead to an audit. A recent IRS report revealed that discrepancies in income accounted for approximately 1.5% of individual audits in 2022.
- High Income: While this is not an error, having a high income increases the chances of an audit. As per the statistics mentioned earlier, individuals with an income of $1,000,000 and above had an audit rate of 2.39%.
- Excessive Deductions: If the deductions on your tax returns are disproportionately high compared to your income, this could raise a red flag. The IRS does not disclose specific percentages, but the principle of staying within the norm for your income level applies.
- Foreign Transactions: Having large foreign transactions or financial interests abroad can also trigger an IRS audit. In 2022, about 1.3% of individuals reporting foreign transactions were audited.
You can learn more about your chances of being audited in our recent article – IRS Audits: Are You Really the Next Target?
When you receive an IRS Audit letter, STOP and consider your options.
Before you communicate with the IRS
about an audit, consult with a tax attorney about your options. Often a client will know the answer to this question at the very beginning. But, here are some of the typical reasons why someone would seek out legal support.
- If there are questionable items on the tax return
- There is no paperwork supporting the items on the return being audited
- If the client thinks that the tax return preparer was not honest or knowledgeable