Separating fact from fiction
It is human nature to fear the unknown. The thought of being audited by the IRS strikes fear in even the calmest of individuals. Many of us picture the man in the dark suit or trench coat, wearing dark sunglasses appearing on our doorstep and announcing he's with the IRS. So when a letter comes in the mail or a call is received from the IRS, even the most prepared individual will get a knot in their stomach. For someone who is not prepared or for those whose records are not in the best of shape, then there can be a real dread associated with that notice.
So let's take a look at IRS audits and separate the fact from fiction. Knowing what to expect can alleviate many of our fears.
Fiction: It's just a matter of time before I'm audited
Fact: On average, the IRS audits only about 1% of individual tax returns
It is far more likely that your return will not be chosen for audit. It helps to understand how returns are selected for audit. According to the IRS, returns are selected using a variety of methods, including:
- Random selection and computer screening – sometimes returns are selected based solely on a statistical formula.
- Document matching – when payor records, such as Forms W-2 or Form 1099, don't match the information reported.
- Related examinations – returns may be selected for audit when they involve issues or transactions with other taxpayers, such as business partners or investors, whose returns were selected for audit.
It is also important to note that selecting a return for audit does not always suggest that an error has been made.
Fiction: I should not claim all of my deductions to avoid the risk of being audited
Fact: Taking deductions to which you are entitled does not increase your chances of being audited
Taxpayers often fear that claiming tax deductions will raise eyebrows at the IRS. That’s not true unless the deductions are excessive as compared to your level of income. When returns are filed, they are compared against “norms” for similar returns. The “norms” are developed from audits of a statistically valid random sample of returns. If you have the documentation to prove your deductions are legit, whether few or many, an audit should not be worrisome. So go ahead and take those deductions!
Fiction: Any correspondence from the IRS means an audit
Fact: Receiving a notice from the IRS could mean any one of a number of things
Many people assume that any correspondence from the IRS means they are being audited, but this is rarely the case. When you get a letter from IRS, open it – don’t ignore it because it is usually not as bad as you think and most correspondence is time sensitive. Sometimes it’s an informational letter (advising you that you might need to file a certain form, etc.), sometimes it’s simply a notice of adjustment in which case you pay what you owe or work something out, and only rarely will it be notification of an audit.
We've only touched on a few of the more common concerns regarding an IRS audit. If you have additional questions, see the IRS' FAQs on the topic here. And remember, if you receive a notice or you are chosen for an audit, fear not! Your tax preparer can assist you.