IRS Audits: Facts and Tips
Though popular culture suggests otherwise, only a tiny percentage of tax returns are audited each year, but knowing what to expect can help taxpayers prepare for a smooth audit process.
July 27, 2012
IRS Audits: Facts and TipsIt begins with receipt of an IRS "review" notice. Many taxpayers fret over the dreaded IRS audit. According to popular knowledge, audits are common, arbitrary and always result in huge penalties. In fact, only a tiny percentage of tax returns are audited each year, and most involve only a modest possible penalty tied directly to a taxpayer's mistake in the most recent tax return. Knowing what to expect can help taxpayers prepare for a smooth audit process if caught in an IRS audit.
Who Gets Audited?
Less than one percent of tax returns are audited each year. In 2011, just over 1.5 million people were audited. While the number of audits is slowly growing, the IRS is focusing primarily on corporate returns, high-income taxpayers and suspected tax evasion.
Audits are determined according to a variety of methods, including random sampling like a lottery, income document matching and computer software screening. Certain populations are more likely to be audited, including higher-income individuals, workers in certain professions, filers of certain types of returns and filers who report certain transactions. Red flags more likely to lead to an audit include large deductions for charitable contributions, business expenses, itemized deductions, tax-shelter losses, complex transactions and any kind of inconsistency, fraud or concealment.
Generally, unless a taxpayer is chosen by random sampling, the IRS initiates an audit based on some evidence. Many audits result in payment of some missed tax amount, plus associated penalties that vary according to the nature of the underpayment and alleged wrongdoing. However, receiving a review notice does not necessarily mean that a tax return was wrong. In fact, some audits result in no penalty, or even a refund, with no required taxpayer action.
What to Do If Audited
If you receive an audit notice, don't panic. Gather all financial and tax records, including checkbook stubs, receipts, bills and any documentation of tax basis and deductibles. Review your return carefully for errors, and contact an experienced tax attorney for advice and help navigating the IRS audit process.
Article provided by The Law Offices of Hugh Janow, LLC
Visit us at http://www.janowlaw.com/