Fix red flags that could result in audit
In 2021, 3.8 out of every 1,000 returns reviewed
As you work on your tax return, you may be wondering if there's anything you can do to avoid being audited.
When you're audited by the Internal Revenue Service, it means your return was selected from a batch of returns for a closer inspection. Sometimes returns are selected at random for a closer review.
But the IRS can't afford to scrutinize everyone's tax returns. That's why the agency uses an algorithm to screen for potential red flags in returns that need to be corrected to reduce the number of underpayments to the IRS and increase tax revenue.
But if you can fix some of those red flags that may trigger an audit before you submit your return, you may be able to avoid getting audited.
What triggers an IRS audit?
A lot of audit notices the IRS sends are automatically triggered if, for instance, your W-2 income tax form indicates you earned more than what you reported on your return, said Erin Collins, National Taxpayer Advocate at the Taxpayer Advocate Service division of the IRS.
That's why Collins recommends taxpayers ensure the income they report on their returns is consistent with the income that's stated in official income tax documents like a 1099 or W-2.
“We find a lot of taxpayers take their last paystub (of the year) and use that number,” she said. But they can run into problems because that last paystub may not cover their typical pay period.
She also recommends parents discuss who will be claiming a child on their return if they file separate returns. They should also ensure additional caretakers like a grandparent don't try to claim a child on their return if they don't meet the IRS' requirements for doing so. An audit may also be triggered if multiple people try to claim the same
child as a dependent on their returns.
While not technically an audit, Collins said, the IRS sent a majority of notices in the past couple of years to taxpayers who have math errors. These were unusually high because taxpayers didn't properly adjust their income after receiving enhanced child tax credits or stimulus checks.
Michael Steffany, a senior tax attorney at Withersworldwide, said in his experience, “the IRS concentrates its efforts on those items most likely to result in a large amount of additional tax due.”
How does IRS pick who to audit?
The IRS says audits can also commonly be triggered through a random selection process in which a computerized system compares your return “against ‘norms' for similar returns,” the IRS said in an online post.
Another trigger: if the information on your return is connected to someone else's, such as a business partner or investor, who is being audited.
Who gets audited the most?
In terms of income levels, the IRS in recent years has audited taxpayers with
incomes below $25,000 and above $500,000 at higher-than-average rates, according to government data.
Treasury Secretary Janet Yellen and acting IRS Commissioner Douglas O'donnell have said that the nearly $80 billion the IRS will be receiving from the Inflation Reduction Act won't be put toward increasing audits above historical levels for taxpayers who earn less than $400,000 a year.
Steffany said the influx of funds is likely to increase the number of audits for high earners, which has fallen in recent years. Collins said that's due to the funding issues the IRS experienced.
Chances of being audited
Last year, 3.8 out of every 1,000 returns, or 0.38%, were audited by the IRS, according to a recent report using IRS data from Syracuse University's Transactional Records Access Clearinghouse.
How does IRS notify you of audit?
The IRS will always reach out to you initially by sending you a letter in the mail. That letter will contain all the information you need to know about your audit as well as when you have to take action.
Most audits then continue to be conducted through mailed correspondences but a small percentage of audits require you to communicate with an IRS agent either in person or over the phone to rectify your return.
How far back can IRS audit you?
An audit the IRS conducts on you can include returns filed within the last three years, according to the IRS.
“If we identify a substantial error, we may add additional years. We usually don't go back more than the last six years,” a post on the agency's site states. “The IRS tries to audit tax returns as soon as possible after they are filed. Accordingly most audits will be of returns filed within the last two years.”
What should you if audited?
Your first course of action should be to “actually open the letter,” said Collins. A lot of people may be tempted to toss them because they think it's going to be bad news, she added.
“The worst thing you can do as a taxpayer is to ignore the correspondence.” You should respond as soon as you can either in writing or by phone. Generally, the letter you receive from the IRS will specify how many days you have to respond. You can also request more time to respond.
Failing to respond can trigger additional penalties and interest. You may also forfeit your ability to contest the charges the IRS believes you owe. It could also escalate matters and result in a legal case.
“Once an audit has begun, it is imperative that you cooperate and develop a good relationship with the IRS auditor,” Steffany, a tax attorney who specializes in compliance cases, said. “Far too often taxpayers take an aggressive posture which leads to audits spiraling far afield from where they began.”
“In addition, where possible attempt to understand what the IRS is actually questioning and answer those questions in a specific and thoughtful way,” he added.