IRS Audit and What to Expect

The IRS neatly describes an IRS audit as “a review/examination of an organization’s or individual’s accounts and financial information to ensure information is reported correctly according to the tax laws and to verify the reported amount of tax is correct.” This statement is clear; however, it certainly leaves many questions unanswered. Let’s take a look at common questions about the IRS audit.

Crash Course on the IRS Audit

Let’s be clear: the chances of you being chosen for an IRS audit are not as high as you might think. Read more about that below.

The audit department within the IRS has a choice of methods for conducting the process. These choices include notices via U.S. Mail, in-person meetings at the IRS office, and field audits.

Notices via U.S. Mail

The IRS directs and completes audits by mail most of the time. The taxpayer receives a letter to inform him or her of the impending audit. The IRS explains saying, “If we conduct your audit by mail, our letter will request additional information about certain items shown on the tax return such as income, expenses, and itemized deductions. If you have too many books or records to mail, you can request a face-to-face audit.”

In-Person Meeting

Sometimes, the IRS has many more questions than what documents or written evidence can provide the answers to. These cases are certainly served well by face-to-face audits. Experts recommend hiring a tax adviser as your spokesperson for in-person audits. The IRS isn’t shy about using any statements you make to their advantage. Your tax adviser can help prevent you from unwittingly saying things that can get you into trouble.

Field Audit

Field audits are so named because the revenue agent seeks to meet with you and your tax adviser at your home or office. The IRS agent has the chance to examine the data on your return more carefully when they come to you. They take this option to conduct a more thorough inquiry when they note a red flag or two on your return. Because of this, experts recommend hiring a tax adviser to represent you during this kind of audit.

What will happen at the end of the audit?

One of the three following outcomes may result, regardless of the audit method:

1. The revenue agent confirms the data on the return and no changes are made.
2. Changes that need to be made result in a refund owed by the IRS.
3. Changes that need to be made result in more tax owed by the taxpayer.

The IRS adds penalties and interest to the balance when more tax is owed. The taxpayer is expected to pay all taxes due by the deadline of the year filed. There are no exceptions to this rule.

Most audits result in added tax owed. However, according to the Motley Fool, of the “almost 90 percent of audits” that resulted in a change to the return originally filed, “over $1 billion in refunds was distributed to taxpayers who underwent audits” in 2015.

Will I have to undergo an IRS audit?

The good news is that the rate of IRS audits is down notably over recent years.

According to Thomas Heath, a reporter at the Washington Post, “The IRS has a lot less of everything compared with a decade ago. That might make the fast-and-loose crowd feel better, but it shouldn’t.” In fact, Heath asked the IRS an interesting question.

“If the number of revenue officers has gone down, why is the amount of revenue collected up?”

They answer in an email, “Not all of the revenue attributed to collection is the direct result of the efforts of revenue officers. Collection revenue not only comes from the work of revenue officers, but also from automated collection programs and collection notices that are automatically generated and mailed to taxpayers.”

Although this is great news for the common taxpayer, this could be daunting news for the wealthier taxpayers among us. That’s because these taxpayers tend to have complex tax returns with several investment options. Therefore, missteps uncovered in an audit of wealthy taxpayers have a better return on their resources.

The IRS shared some enriching data on the subject:

• Roughly 196 million tax returns were audited in 2017. The IRS audited about .5 percent of them. That’s almost one million tax returns!
• The IRS conducted 8 percent of audits by mail in 2018.
• Almost 30,000 audits resulted in another refund to taxpayers, which totaled more than $6 billion dollars.

Some Perspective

Accounting Today, a leading resource for public accountants, says, “Only one out of every 184 taxpayers experienced an IRS audit in 2017, and less than a quarter of these audits are conducted in person by the IRS.”

Furthermore, Nerdwallet reports the rate at which specific income brackets were audited in 2017. The report illustrates a bell graph. The highest rates of audit occur in returns with almost no income reported for the year. The IRS audits income brackets of up to $500,000 at a rate of less than one percent. In contrast, income brackets of over $500,000 were audited at a much higher rate.

Finally, the highest rate of audit occurs in the highest income bracket of over $10,000 at 14.52 percent. That’s almost double the rate of audit of the next highest income bracket, which is $5 million to $9,999,999.

What reasons constitute an audit to the IRS?

Nerdwallet cites seven reasons that the IRS might audit a taxpayer:

1. Math errors
2. Not reporting some of your income for the year
3. Claiming big donations to charity
4. Too many losses
5. Too many deductions
6. Claiming a home office deduction
7. Using clean, round numbers

Some Details About These Reasons

The IRS makes corrections of minor math errors on returns all the time without our knowledge. Although, more substantial math errors are taken more acutely. The IRS doesn’t assume that they’re innocent mistakes. Therefore, penalties and interest may be applied to the resulting tax assessment at the revenue agent’s discretion.

All income, regardless of its kind (W-2 or 1099,) must be reported to the IRS. This isn’t limited to jobs or services you performed throughout the year. You may also be required to pay taxes on the interest you receive on a bank account. The IRS doesn’t give any concessions to taxpayers who forgot to submit the income. Taxpayers who didn’t know it should’ve been included get no leeway either. Leaving any income out, regardless of intention, signals to the IRS that an audit is in order.

Only claim deductions, credits and losses that you can ratify. Many taxpayers feel tempted to “estimate” what they’re entitled to. Sometimes they opt to error on the opposite side of caution. This is commonly because the likelihood that they’ll be selected for an audit is low. However, the penalties can be severe if you don’t put the correct numbers on your return.

Take extreme care when listing a home office as a deduction. Some taxpayers are inclined to inflate the deduction. This is becoming common as remote work becomes more popular with employers and employees, alike. The IRS is aware of this, so don’t do it. Be sure to precisely measure the work space that is committed to just your job. The couch and a TV tray in your living room don’t count as a work space.

One last thing on reasons for an audit…

In conclusion on this topic, be sure that you round your numbers to the nearest dollar. If you’re a graphic designer, you might invest in a new computer for $1,891.45. You might be tempted to claim that it was $2,000. This can be easily justified due to a round up to the nearest thousand. However, the IRS will expect you to claim that it was $1,892. A clean, round number of $2,000 may catch the revenue agent’s eye and prompt the initiation of an audit.

How do I handle an audit?

Audits can be tricky beasts for the average taxpayer. The tax code is complex. Even revenue agents must use Audit Technique Guides for several occupations. Consequently, it can be easy for taxpayers to inadvertently give the revenue agent misconceived information.

If you receive a notice that says you will undergo an audit via U.S. Mail, first of all don’t panic! You may feel somewhat comfortable responding on your own. However, we encourage you to contact Tax Champions if you aren’t confident responding on your own. In addition, we encourage you to contact us if your audit will be conducted in person.

Tax Champions has over 35 years of experience working with clients in an audit proceeding. We understand the complex tax code and speak the same language the IRS does. So, we understand their inner procedures and what they’re looking for. Our full-service staff is available all year-around. We can take on your case and act now to achieve the best results you qualify for because of this.

We strive to meet and exceed our customers’ confidence in us. Therefore, we invite you to review our A+ rating at the Better Business Bureau with no customer complaints. We also have no complaints with the Board of Accountancy, nor the IRS. We’re available every day during business and evening hours to discuss your case.

Contact Tax Champions today!

Give us a call at 800.518.8964 for a free case review with no obligation to hire our firm. We’ll discuss the details of your case and how we can help you. If you choose to hire our firm, we’ll take over the communications with the IRS for your protection and get started right away. The IRS is obligated to let us speak on your behalf after you hire our firm.

Call us now. You can also reach us by submitting your contact information in the blue box on the right side of this page. We’ll reach out to you as soon as possible. Finally, we also offer a chat tool at the bottom of this page. Our knowledgeable staff will be happy to chat with you.

Call us today and you’ll certainly sleep better tonight.

Sources

[1] Audit Techniques Guides (ATGs). (n.d.). Retrieved June 13, 2019, from //www.irs.gov/businesses/small-businesses-self-employed/audit-techniques-guides-atgs

[2] Backman, M. (2016, December 23). What Happens If You Get Audited? Retrieved from //www.fool.com/retirement/2016/12/23/what-happens-if-you-get-audited.aspx

[3] Buttonow, J. (2019, April 09). The Ten Commandments of an IRS audit. Retrieved from //www.accountingtoday.com/list/the-ten-commandments-of-an-irs-audit

[4] Enforcement Examinations | Internal Revenue Service. (2019, May 17). Retrieved from //www.irs.gov/statistics/enforcement-examinations

[5] Heath, T. (2018, April 06). Your chances of an IRS audit are way down. But keep it on the up and up. Retrieved from //www.washingtonpost.com/business/economy/your-chances-of-an-irs-audit-are-way-down-but-keep-it-on-the-up-and-up/2018/04/06/cb6c5794-3779-11e8-9c0a-85d477d9a226_story.html?noredirect=on&utm_term=.83392ccf4520

[6] IRS Audits. (2019, June 3). Retrieved from //www.irs.gov/businesses/small-businesses-self-employed/irs-audits

[7] NerdWallet. (2019, February 08). 7 Reasons the IRS Will Audit You. Retrieved from //www.nerdwallet.com/blog/taxes/7-reasons-irs-audit/

[8] Tax Champions | Better Business Bureau® Profile. (n.d.). Retrieved June 13, 2019, from //www.bbb.org/us/ca/ventura/profile/tax-consultant/taxchampions-1236-92012281