Mention “IRS audit” and most people envision a steely-eyed agent in a stuffy room questioning everything on their return. In reality, there are five types of audits:
Only a small percentage of all the individual returns filed each year will be audited. However, the higher your income, the greater your chances of an audit.
One tool used by the IRS in selecting returns to audit is the Discriminate Income Function (DIF). Each return is scored by the DIF for audit potential. Income is compared to deductions and “red flag” items are noted (for example, tax shelters, home office deductions, etc.).
Absent fraud or substantial understatement of income, the IRS generally has three years from the due date of your return to initiate an audit.
Typically, most returns are selected within two years of their filing date. As you might guess, many things are forgotten over two years. Consequently, when preparing your return, it pays to document and support the items on it.
Your chances of being audited are higher than normal if you fall into certain categories or report certain things on your tax return. Some of the higher risk items and areas include:
In auditing returns, the IRS isn’t necessarily limited to a single year’s return. The Service uses computers to help identify for audit those returns that are most likely to produce additional tax revenue.
When there is reasonable cause to suspect unreported income, the IRS may ask the taxpayer to explain the discrepancies between reported income and the taxpayer’s lifestyle.
It’s wise to contact your accountant when you receive an audit notice. Experienced accountants know how to respond to audit requests.
Many IRS audit notices are incorrect. Yet, taxpayers often meekly pay additional taxes being assessed, assuming the IRS is right or fearing a full-blown audit if they question a notice. Your accountant can review an IRS notice for accuracy and decide if his or her services are required, or if you can easily handle the matter yourself.
Don’t let fear of an audit keep you from taking legitimate deductions on your return. Just remember, as long as you have written documentation to support items on your return, you will be prepared to face any IRS challenge.
Contact our office if you would like details or assistance with any of your tax concerns. We’re here to help you.
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