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- Save on Back-To-School Supplies by Shopping Sales Tax Holidays
- Why Corporations Pay Less Taxes than You
- One Court Ruling Shoots Down Obamacare, Another Backs It Up
- Have You Got The Power … of Attorney, That Is?
The IRS describes an audit as “An examination conducted by mail or through an in-person interview and review of the taxpayer’s records. The interview may be at an IRS office (office audit) or at the taxpayer’s home, place of business, or accountant’s office (field audit).”
So a tax audit is a closer look at your tax return, or some part there-of, most often performed in the hope that the government can shake a few more tax dollars from your pockets. Unfortunately, you can’t predict how likely you are to warrant that extra attention.
Or can you? The IRS isn’t going to reveal exactly how they select returns for audit any more than Colonel Sanders is going to reveal his secret recipe, but at least Uncle Sam will provide some hints. You might find some clues at the IRS website where you can read a paper called The Examination (Audit) Process. One general rule of thumb that probably will come as no surprise: the more you make, the better your audit odds. But high income isn’t the only trigger.
According to IRS spokesperson Mike Dobzinski, “There are some situations that may generate an audit more than others. Higher incomes, people that are self employed, or if your deductions are disproportionate to your income.”
Here’s a short TV news story we recently produced about audit odds. Check it out, then continue below for more information.
Now let’s take a more detailed look at what can trigger an audit.
Audit Trigger: Income
The IRS publishes a report every year detailing how much they collect through audits and who they collect it from. As we said in our video news story, last year the IRS collected close to $50 billion. Here’s another look at your audit odds based on income:
- If you made under $200,000 last year, your odds of an audit are about 1%.
- Incomes over $200,000 but less than $1 million had audit odds of nearly 3%.
- With an income over $1 million, your odds of an audit increase to nearly 6.5%.
Audit Trigger: Cash Earner
Another type of return Uncle Sam likes to examine more than others are those from cash-earners. People who earn a large portion of their income through tips and other cash sources have the means to under-report their income, so the IRS has historically looked at their returns more often than those of tax-payers whose income is reported on a W-2, and whose work-related expenses are all reimbursed, even if they’re not big fish.
Audit Trigger: Self-Employed
If you own a business or are otherwise self-employed, you have access to deductions that other taxpayers don’t. For example, you can deduct your work-related travel, meals, equipment, supplies… even part of your house if you work from home. That’s a lot of opportunity for abuse, which makes this another type of taxpayer the IRS is more likely to target.
Audit Trigger: Mistakes and/or Deductions and Income Out of Sync
Most income you report on your return is also reported to the IRS by whomever paid it. If you report less than the IRS has been notified you received, expect to hear from them. An example of how, when it comes to taxes, simple actions can lead to expensive and inconvenient reactions. That’s why it’s important to take your time and keep mistakes to a minimum.
And make sure mistakes are innocent. When the feds couldn’t make bootlegging, racketeering, gambling or murder charges stick against notorious gangster Al Capone, they went after him for failure to pay income taxes. Turns out Al was living large but reporting relatively small income. So the Treasury department did something the FBI couldn’t: put him in Alcatraz. Report income that’s out of sync with your lifestyle or claim deductions that are out-sized relative to your taxable income and you may be raising eyebrows at the IRS.
Audit Trigger: Dumb Luck
As with the security line at the airport, some people are picked for additional screening at random. So even if you’re not in a high-risk group, it’s still possible to be audited.
You Get an Audit Notice: Now What?
According to the IRS website, you have rights as a taxpayer, including:
- Professional and courteous treatment by IRS employees.
- A right to privacy and confidentiality about tax matters.
- A right to know why the IRS is asking for information, how the IRS will use it and what will happen if the requested information is not provided.
- A right to representation, by oneself or an authorized representative.
- A right to appeal disagreements, both within the IRS and before the courts.
If you hired help to have your taxes prepared, one of your first calls should be to that tax pro to ask for guidance. But there’s no reason to freak out. While odds are good that the IRS has selected your return in search of more money, that’s not the same thing as saying they’re right, you’re wrong and you’re in hot water. They could just be looking for clarification: e.g., they don’t understand how your deductions relate to your job. Or you may have forgotten to report some income that was reported to Uncle Sam and he needs to know why.
In short, if you or your tax preparer did an honest job of reporting your taxable income and deductions, you have nothing more to fear from the IRS than perhaps the inconvenience of responding to a letter, visiting an office or otherwise meeting with an agent. Unless you’re systematically and deliberately defrauding the government by not reporting money you make or falsifying deductions you take, the worst that can happen is a check… not jail. And time is on your side. The IRS typically goes back no more than three tax years for audit purposes. So if you made a mistake a few years ago, you’re probably home free.
Exception? If you’re systematically under-reporting your income, the IRS can go back until the moment of your birth.