Basic Facts about the IRS Audit to Know About

by Emily Guy Birken · 1 comment

IRS and taxes

Most taxpayers would probably prefer to do nearly anything (including going through an anesthetic-free root canal procedure) than be audited by the IRS.

However, if you are an honest taxpayer, audits shouldn’t be something you worry about.

Here are some basic facts about audits that should help you to breathe a sigh of relief.

irs auditCertain Red Flags Can Trigger an Audit

With nearly 138 million taxpayers in the United State, the IRS focuses its auditing energy on returns that don’t fit within normal parameters. Ultimately, only 1% of taxpayers are audited each year, and generally those unlucky taxpayers have returns that seem a little off for one of the following reasons:

1. Incomplete or inaccurate returns. Get the math right if you are doing a paper return. Better yet, file electronically so the calculations are automatically done for you.

2. Unreported income. If you’ve received a 1099 from someone, know that they have also sent one to the IRS.

3. Very low or very high income. If you make a great deal less than others in your same profession, that can look suspicious to IRS. Also, though there is nothing wrong with being financially successful, know that those individuals who make more than $100k per year are five times more likely to face an audit.

4. Numbers that seem too perfect. It’s really unlikely that any interest you earned was a perfect, round number. Too many round numbers, and that can trigger an audit.

5. High charitable donations. If you give generously to charity, make sure you keep all your receipts, as going above and beyond the average donation for your income level can seem fishy.

6. A lot of itemized deductions. Again, this is a situation where being different from the average bear can ring some alarm bells. So make sure you only take what you are eligible for and keep good records.

Kinds of Audits

There are four types of audits the IRS regularly conducts:

1. The correspondence audit. This is the most common of the four, and it is also the least invasive audit. In fact, my very first year as a taxpayer, I went through a correspondence audit because I wasn’t aware that my parents had still claimed me as a dependent for the 6 months of that year I was still in college. (This is why you also need to make sure you talk to your family about taxes!) For this type of audit, the IRS will send you correspondence asking for documentation in order to clarify something from your return. In my case, I discovered that I owed the IRS more than I thought — not fun for a poor 20-something, but not at all scary.

2. The office audit. These are generally for small businesses. In this audit, your business will receive correspondence asking you to bring certain documentation to the local IRS office for further clarification of your return.

3. The field audit. This is the type of audit that most people think of when they imagine the IRS swooping in with calculators, pencils, forms in triplicate and vultures. Generally, the field audit is used for large businesses and corporations. An auditor or a team of auditors sets up a time with the company to come on-site to perform the audit — giving the company plenty of time to prepare any necessary documents.

4. The Taxpayer Compliance Measurement Program audit. The TCMP audit can theoretically “ding” any taxpayer, as it allows the IRS to randomly perform audits. However, this audit usually hits individuals who make over $1 million per year or businesses with several possible red flags. However, since it is possible to be audited under this program even if you have a perfectly normal and legitimate return, always make sure that you save your records for at least four years.

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