Your odds of being audited by the IRS are likely less than you might expect. Unlike presidential candidates, your personal returns are not typically sought out by the IRS. There are some reasons why you might be audited, and they are not always because an error has been made. Read on to see why your return might be audited, what that means for you and how long the process typically takes.

Audit Triggers

Check out our blog, “What Prompts an IRS Tax Audit?” Typical triggers include (but are not limited to):

• High income- The more income you have, the more likely you are to be audited. If you make more than $200,000 annually, be prepared for potential audit. Hence, individuals with income less than $200,000 have a less than 1% chance of being audited; while individuals making between $200,000-$1,000,000 have a less than 4% chance of being audited; and over $1,000,000 about 10% chance of being audited.
• Unreported income- Just as suspicious as high income is to the IRS, so is a lack of income. If you are a sole proprietor with a Schedule C business and report a loss for more than three years in a row, your chance of audit grows. The IRS will want to double check that this loss is honest and accurate and not a “hobby loss”.
• Charitable contributions- If you take a deduction for an amount larger than the average charitable donation deduction for your income level, you could attract IRS attention. Make sure you have proper supporting documentation, such as receipts, cancelled checks or appraisals.
• Foreign bank accounts- The IRS is very wary of foreign bank account holders, even if your account is completely legitimate. It helps to have accurate reporting and recordkeeping proof on your side, however, so make sure you are compliant with the strict reporting requirements of Form 8938 and FinCEN Form 114. If not, the penalties will be severe.
• Home offices- If you work from home, expect to be under more scrutiny. The IRS has stringent rules regarding home office deductions. To prove that your home office meets these guidelines, you must show that the space is used exclusively for business purposes.
• Business meals and entertainment- Excessive deductions for business entertainment will attract the attention of the IRS. Make sure you’re not overdoing it.

Other Reasons for Audits

• Random selection- There is a chance that your return could be singled out randomly based on a statistical formula or computer screening.
• Document matching failures- This is an easy catch by the IRS computers. The IRS gets all your W-2 and 1099 forms. If these forms are on record with the IRS and do not match the information reported on your tax return, you will more likely face an IRS audit.
• Related audits- Your return could be selected for an audit when you have business transactions with other investors or business partners whose own returns were selected for audit.

It should be noted that your chances of being audited dwindle down to about a 1 in 330 chances if you don’t have business, rental real estate or farm income to report on your return, or if you do not have earned income tax credits or employee business write-off expenses to report.

How will the IRS notify you?

The IRS will alert you that you have been selected for an audit in two ways—by mail or telephone. The IRS will not use e-mail to notify you. Please note, when the notification is by telephone contact, the IRS will also send a letter confirming the audit. Be aware there has been an increase in scam calls from individuals claiming they work for the IRS. The IRS will NEVER call to demand immediate payment, nor will the agency call about taxes owed without first having mailed you a bill. Do not give out any personal information such as social security numbers or payment information if you do receive such a call. Check out our blog for more on this.

How is an IRS audit conducted?

Once you are selected for an audit, you will have either a correspondence audit or field audit. Most audits are correspondence audits where you receive a notice which requires you to respond with proper documentation. Field audits are in-person interviews with an IRS agent either at your home or office, your accountant’s office or local IRS office. Prior to this meeting, the IRS will tell you what records are needed, and any proposed changes to your return will be explained during the meeting.

How long does an audit take?

Audit length varies depending on type, complexity, availability of requested information, availability of you and the agent for meetings, and how you feel about the IRS’s findings after the audit is complete (agreements/disagreements).

What are the potential outcomes of an IRS Audit?

More often than not, an IRS audit results positively, rather than in hefty penalties or legal action. Sometimes audits result in refunds for affected taxpayers. Every year, tens of thousands of taxpayers receive a check from the government after their IRS audits.

If the IRS does end up finding an error on your return(s), you will have to follow The IRS Collection Process. The IRS will send you a bill of what you owe including any penalties and interest for a late and/or neglected filing. There are several ways you can pay what you owe. The IRS accepts electronic payments (DirectPay), by credit/debt, by mail or in person. Check out Publication 594: The IRS Collection Process for more details.

Don’t live in fear of an IRS audit; more than 99% of returns have historically avoided audits. Remember, diligent record keeping is the best defense against IRS audit. In the event that you are audited, having good records on your side is always a good thing.

For more information on IRS audits, contact a member of our Tax Services Team.