IRS audit rates are historically low, according to the latest data, but that is little consolation if your return is among those selected to be examined. But with proper preparation and planning, you should fare well.
In fiscal year 2019, the IRS audited approximately 0.4 percent of individuals. Businesses, large corporations, and high-income individuals are more likely to be audited but, overall, all types of audits are being conducted less frequently than they were a decade ago.
There is no 100 percent guarantee that you will not be picked for an audit because some tax returns are chosen randomly. However, the best way to survive an IRS audit is to prepare for one in advance. On an ongoing basis you should systematically maintain documentation — invoices, bills, cancelled checks, receipts, or other proof — for all items to be reported on your tax returns. Keep all your records in one place. It also helps to know what might catch the attention of the IRS.
Audit Hot Spots
Certain types of tax-return entries are known to the IRS to involve inaccuracies so they may lead to an audit. Here are a few examples:
- Significant inconsistencies between tax returns filed in the past and your most current tax return
- Gross profit margin or expenses markedly different from those of other businesses in your industry
- Miscalculated or unusually high deductions
Certain types of deductions may be questioned by the IRS because there are strict recordkeeping requirements for them — for example, auto and travel expense deductions. In addition, an owner-employee salary that is inordinately higher or lower than those in similar companies in his or her location can catch the IRS’ attention, especially if the business is structured as a corporation.
Responding to a Letter
If you are selected for an audit, you will be notified by letter. Generally, the IRS does not make initial contact by phone. But if there is no response to the letter, the agency may follow up with a call.
Many audits simply request that you mail in documentation to support certain deductions you have taken. Others may ask you to take receipts and other documents to a local IRS office. Only the harshest version, the field audit, requires meeting with one or more IRS auditors. (Note: Ignore unsolicited email messages about an audit. The IRS does not contact people in this manner. These are scams).
Keep in mind that the tax agency will not demand an immediate response to a mailed notice. You will be informed of the discrepancies in question and given time to prepare. You will need to collect and organize all relevant income and expense records. If any records are missing, you will have to reconstruct the information as accurately as possible based on other documentation.
If the IRS chooses you for an audit, our firm can help you:
- Understand what the IRS is disputing (it is not always clear)
- Gather the specific documents and information needed
- Respond to the auditor’s inquiries in the most expedient and effective manner
The IRS normally has three years within which to conduct an audit, and often an audit does not begin until a year or more after you file a return. Do not panic if you are contacted by the IRS. Many audits are routine. By taking a meticulous, proactive approach to how you track, document, and file your company’s tax-related information, you will make an audit much less painful and even decrease the chances that one will happen in the first place.