Ah, the IRS: A mysterious and relatively unknown force in modern society – like the wind, only with much larger tax forms. But as mysterious as the Internal Revenue Service may seem, taxpayers need to understand which categories are more likely to be audited. Our fear of the unknown can be assuaged by breaking down the risk factors that can lead to an IRS audit. So, without further ado, let’s explore who gets audited by the IRS…and learn how to mitigate our risks in the process.
Who is at risk of an IRS audit?
There isn’t a one-size-fits-all answer to who gets audited by the IRS, but some risk factors include higher income, business expenses, certain tax credits, and international investments. Individuals earning over $1 million per year and businesses reporting sales over $100 million are also at higher risk of an audit. However, personal audit rates have decreased significantly in recent years, and less than 1% of taxpayers who reported an adjusted gross income of $25,000 or less were audited in 2018. Self-employed individuals must pay close attention to deductions, which can sometimes cause red flags for IRS agents.
The audit risk factors
The primary risk factor for an audit is under-reporting of income, which can be due to discrepancies in reporting combined incomes, unjustifiable tax deductions or credits, mischaracterization of income, and wrong projected taxes. Taxpayers who claim large business expenses, non-cash deductions, and complex investments may also face extra scrutiny.
While certain individuals may have a higher risk profile, most audits stem from the automated process used by the IRS. Taxpayers who file accurate documents and report all income should not fear being audited.
Amount of Income
The amount of money you make is one of the most important factors in determining whether or not you are at risk for an audit by the IRS. Those who make higher incomes typically have a greater chance of being audited than those with smaller incomes.
On the one hand, it makes sense that those making more money may be more likely to be audited. It is thought that due to their higher incomes, there is a greater incentive to avoid paying taxes and therefore justify a more thorough examination by the IRS.
On the other hand, if those higher-income earners have correctly reported their income and properly accounted for all deductions, they should not be punished by increased scrutiny simply because they make more money. The burden of proof is already placed on taxpayers, so adding an additional layer of prejudice based solely on income could alienate taxpayers and even discourage them from complying fully with their filing duties.
Therefore, while income can certainly be a factor in IRS audits, it should never be assumed that your extra income automatically means you will be subject to additional investigation. To reduce your chances of an audit, it is important to understand the other factors involved and how best to manage them.
How to reduce your chances of an Audit
While no one can guarantee that they won’t be audited by the IRS, there are some steps taxpayers can take to reduce their chances of being audited. Here are a few ways to minimize the risk:
- Report all income: Accurately reporting all income earned, including tips, freelance work, and investment earnings, is essential. Inconsistencies in reported income can lead to audits, so make sure to double-check your tax return for accuracy.
- Keep detailed records: Keep detailed records of all your expenses and receipts, especially for any large deductions you plan to claim. Having proper documentation can help you prove the legitimacy of your deductions and avoid triggering an audit.
- Don’t be too aggressive with deductions: Claiming too many deductions, especially if they seem excessive compared to your income, can draw the attention of the IRS. Make sure to claim only the deductions you are entitled to, and avoid inflating the value of any deductions.
- Use a professional tax preparer: While you can prepare your taxes on your own, using a professional tax preparer can help ensure your return is accurate and meets all requirements. Tax preparers can also provide guidance on which deductions to claim and how to avoid triggering an audit.
- File on time: Filing your tax return on time can help reduce the likelihood of an audit. Late filers may be flagged by the IRS, so make sure to file your return by the deadline.
Remember, audits are not always avoidable, but taking these steps can help minimize your risk. Ultimately, ensuring accurate reporting and proper documentation can help you avoid headaches and penalties associated with an audit.
What to do if you’re audited
If you are selected for an audit, don’t panic. While an audit may be a stressful experience, it does not necessarily mean that you have done anything wrong. The IRS conducts audits to ensure that taxpayers are complying with tax laws and regulations. Here are some steps to take if you are audited:
- Read the IRS notice carefully: The IRS will send a notice explaining the reason for the audit and requesting specific documentation or information. It is important to read the notice carefully and respond within the specified time frame.
- Gather documentation: It is essential to acquire and organize all the requisite documents that the IRS will need to support audit items if your business gets audited. Make sure you have everything well-prepared or else risk a delay in getting through this process!
- Seek professional help: If you are unsure of how to respond to the IRS or what documentation to provide, consider hiring a tax relief company like Ideal Tax to assist you. We highly recommend them due to their free tax consultation.
- Be cooperative and responsive: The IRS may request additional information or clarification. It is important to respond promptly and provide any additional documentation that is requested.
- Understand the outcome: Once the IRS audit has been completed, you’ll receive a written report that details any alterations made to your tax return. If these changes are accepted by you, simply sign off on the document and settle whatever taxes must be paid after adjustments. However, if you’re dissatisfied with the outcome of this investigation then don’t worry -you have every right to dispute it!
Remember, being audited does not mean that you have done anything wrong. It is important to respond to the IRS in a timely and cooperative manner and to seek professional help if needed.
What to expect in a Business Audit
If your business is chosen for an audit, prepare by organizing all financial records, which the IRS auditor will review, along with requesting additional documents and information. Penalties and back taxes may be assessed if filing errors or irregularities are found. The amount of the penalty depends on various factors. It is possible to reduce worry about an audit by understanding the process.
Should you worry about an Audit?
The chances of being audited by the IRS are relatively low, with less than 1% of taxpayers selected for an audit. However, some groups, such as the self-employed, high-income earners, and those claiming unconventional deductions, may be more at risk. Unless deliberately under-reporting income or taking inappropriate deductions, there is usually no need to worry.
The IRS may only seek clarification or additional information, and having records available to support your tax return items can alleviate any concerns.
Final thought:
If you are worried about being selected for an audit, understanding the risk factors can help ease your mind or give you a plan of action. The IRS looks at various information when deciding who to audit, so it is important to stay up-to-date on your taxes and understand the ins and outs of filing.
If you have questions or need help ensuring your taxes are filed correctly, reach out to a professional. They can help put your mind at ease and ensure everything is done correctly come tax season.
