IRS data indicates that fewer than one percent of all individual income tax returns are audited each year. That is true, but some taxpayers are more vulnerable than others. For starters, the IRS is more likely to audit taxpayers who report high incomes because that is where larger amounts of underpaid taxes might be found.
The latest numbers from the IRS reveal that about 1.5 percent of all taxpayers with income in the $200,000-$500,000 range are audited. With income from $500,000 to $1 million, the percentage increases to around 3.8 percent, while more than 8.4 percent of taxpayers with seven-figure incomes may face IRS questions.
In addition, certain taxpayers face more scrutiny because of how they earn their living. Self-employed individuals — generally, those who file Schedule C (IRS Form 1040), Profit or Loss From a Business — may be audited more than other taxpayers. The same is true for professionals and business owners, who could see their business as well as their individual tax returns examined. The bottom line is that taxpayers with relatively high incomes as well as those who have control over their workplace bookkeeping can expect to face IRS queries at some point.
If you are wondering how you should respond when you are audited, the answer is straightforward: call our office. We will let you know how to proceed and offer assistance if professional help is warranted. Nevertheless, receiving correspondence from the IRS (or from your state’s tax authority) can be a stressful experience. The following summary of audit types may ease the pressure a bit, by spelling out what will be required:
- Correspondence audit. These audits are the most common. Generally, they relate to a relatively minor discrepancy, such as faulty paperwork. You often can respond by mail to verify an item on your tax return and never have to meet anyone from the IRS.
- Office audit. These examinations involve a visit to an IRS office, where you will meet with someone from the agency. In a typical situation, you will be informed of the issue involved and instructed to bring documents to support what you reported on your tax return. If you have deducted substantial charitable contributions, for example, you could be asked to bring cancelled checks, acknowledgment letters from the recipients, and other required materials.
- Field audit. Here, the IRS will visit your home or office for the audit. These audits might be more far-reaching, or the examiner might want to check on something specific, such as home office deductions you have claimed.
Know your rights
For any type of audit, professional assistance can be valuable. Indeed, you are entitled to have a CPA, an attorney, or an enrolled agent represent you at an office or a field audit. In such a situation, it may be possible for the audit to take place at your CPA’s office.
You also can receive help in requesting a postponement, if you need time to gather your records. If you must be present during the audit, you should answer all questions accurately, but there is no need to volunteer any information that the IRS does not request. If an appeal of IRS findings seems warranted, your CPA can handle that as well.
Avoiding an audit may be difficult if you are self-employed, a business owner, or a highly-compensated employee. Probability may put you under the IRS spotlight someday.
Recognizing your vulnerability, take steps to minimize your financial exposure in case the IRS selects you for an audit. Report your income and your justifiable deductions accurately. Do not overlook income reported on various 1099 Forms. In case of grey areas, discuss the matter thoroughly with the professional preparing your tax return and carefully consider extremely aggressive positions.
Keep in mind that the IRS communicates first by U.S. mail. If you receive an email purporting to be from the IRS, or a phone call demanding immediate payment, it is a fake.
Trusted Advice: Audit Rights
- Notices must include the amount (if any) of the tax, interest, and certain penalties you owe and must explain why you owe these amounts.
- If the IRS fully or partially disallows a refund claim, it must explain the specific reasons why.
- If the IRS proposes to assess tax against you, it must provide a letter with an explanation of the entire process from examination (audit) through collection and explain that the Taxpayer Advocate Service may be able to assist you.
- This IRS letter must tell you about a possible review by an independent Office of Appeals.
Help with ‘Understanding Your IRS Notice or Letter’ is available online at on the IRS’ website here.