The thought of being audited by the IRS can be horrifying. Much of that fear probably comes from not really understanding an audit. In many cases, people don’t understand how or why they are getting audited, what they need to do once they find out they are being audited, and what happens next for them.
IRS Tax Audit
After the tax deadline has passed, and while you wait for your tax refund to show up, let’s find out more about a tax audit. Before you stress about being audited, here is exactly what being audited means, how to avoid it, and what to do if you happen to get audited.
Photo Credit: Simon Cunningham
What is an Income Tax Audit?
If you are being audited, it means the IRS is reviewing and examining your accounts and financial information. You may need to resubmit documents and information to them to prove or double check information you have already submitted.
Why am I Being Audited?
- It could be a simple error. Something as simple as spelling your name wrong, missing a number here or there, not checking a specific box you meant to, or missing a social security number could trigger a tax audit.
- It doesn’t necessarily mean you made a mistake. Just because you are getting audited, does not mean you made a mistake while you were filing. There is also random selection based on statistical formulas.
- You may have not confirmed what has already been reported. If your documents and figures may not be matching what the IRS already has, this could trigger an income tax audit. If your Form 1099, W-2 forms, and other income records don’t match exactly, you may have a greater chance of being audited. Anytime you received a 1099, the company or person you filled it out for, is reporting how much you earned to the IRS. The same is true for your W2s, as your employer has sent their copy to the IRS as well.
Common Misconceptions of an Audit
- You’ll have an IRS worker knocking at your door. While there are instances where an IRS worker will make an appointment with you to figure out the confusion, many times it will simply be a mail request asking you to provide valid documentation.
- Only the super rich or business owners get audited. This is false. The reality is that any income level can get audited.
- If I don’t take deductions or claim certain things, I won’t get audited. This just isn’t true either. And not taking deductions or claiming certain items, like the Home Office Tax Deduction if you qualify for it, can result in you losing money that is rightfully owed to you by the government. The important thing is to report any amount accurately and to have proper, paper documentation to prove all of these numbers.
How Can I Prevent an Audit?
In some cases, a tax audit is unavoidable, such as random IRS audits. However, there are things you can do to avoid an audit.
- Understand the tax laws that apply to you. Each person has a unique situation. Be sure you understand the tax laws that apply to you, if you need to file taxes, which tax bracket applies to you and what you qualify for.
- Double check your figures. When filing your taxes, double check that all of the information you are entering is correct. Specifically, double check your math for any figures you are entering. You can also use our tax calculator to check your calculations.
- Go to a reputable tax professional. If you are choosing to get your taxes done professionally, be sure that it is a reputable tax professional. Research the specific person to find out what type of experience they have, how long they have been doing taxes, and what their credentials are. Read reviews online, and also check out their score on the Better Business Bureau to see if they had any complaints filed against them.
- Save all of your documentation. Save all of your receipts, and keep track of any activity that you plan on reporting to the IRS. Also see How Long Do We Really Need to Keep Those Papers?
What Should I Do When I’m Being Audited?
Don’t freak out. Here are some things you should do when you find out you are being audited:
- Don’t ignore it. While it may be scary, stressful, or confusing, ignoring an audit will definitely not make it go away. In fact, it will make the situation much worse. Don’t overreact or try to get combative. You are better off conducting yourself calm, together, organized, and extremely thorough and succinct while talking on the phone with the IRS or any time you are explaining something in writing.
- Know your rights. According to the IRS, there are many rights you have while you’re going through an income tax audit. For example, you have the right to appeal the disagreements.
- Read all documents carefully. Many times there will be a specific date which you need to respond by to avoid further action. Read all the documents to understand what they are exactly looking for from you and how you need to proceed.
- Consider meeting with a professional. You may want to consider working with a trusted, reputable tax professional that has thorough experience helping people through tax audits. Research the person by finding out what type of experience they have dealing with audits.
- Gather your documents. Once you understand why the IRS is contacting you and what they’re looking for, you can go through and start gathering any documentation you need to respond with. This may be receipts of purchases you claimed, copies of your 1099s, or whatever else they are looking for.
Tax Audit Resources
Check out these resources offered by the IRS’ official website to help you if you find yourself in a tax audit. Another great resource is a tax professional that you trust and has excellent experience, credentials, and good reviews online.
- The IRS has a segment of videos to explain what is happening through an audit, through audit notification to audit closing. The videos answer important questions, and it follows various people through the process of being audited.
- Check out the IRS explanation of appeal rights to understand your rights through this process.
What is your experience being audited? What are some misconceptions you had about being audited?