Basics of an IRS Audit
If there is one word that strikes fear in the hearts of every taxpayer, that word is “audit.”
Most people don’t truly understand what an audit actually entails, why they would be the victim of an audit, and what to do in case they find themselves on the wrong side (implying that there is a right side) of an IRS audit.
An IRS audit is an examination of an organization's or individual's accounts and financial information to ensure that information is reported correctly according to tax laws and to verify the reported amount of tax is correct.
Many people have the misconception that the IRS just pulls random names out of a hat to decide which taxpayer is audited. This is partially true. At least a portion of people and businesses chosen for audit by the IRS every year are chosen by a statistical formula. The IRS compares your tax return against "norms" for similar returns and may trigger an audit depending on how you compare to returns it deems similar.
Another situation that may trigger an audit is a related audit with another taxpayer. An example of this would be if your employer, who is under audit, claims to have paid you $150,000, but you only claimed that you made $100,000. Because the numbers are dependent on a transaction with another taxpayer and relevant to the other examination, the above situation may result in an audit for the person who underrepresented their income on their tax return.
As you deal with tax filing in the future, it is important to know that there are a variety of circumstances that can lead to a greater chance of the IRS selecting your return for an audit. Some scenarios that increase the chance of an audit are:
- Failure to report all taxable income- because the IRS gets a copy of W2s and 1099s that you receive during the year, it is important that all of the income reflected on those documents is on the tax return.
- Disproportionately large charitable deductions- having deductions that are too large for your income can trigger an IRS audit.
- Having a cash business- while handling cash itself is not evidence of any wrongdoing, the IRS knows that people who deal with cash have a greater likelihood of underreporting income.
- Incorrect mathematical calculations- having incorrect math on your return can be a trigger for an audit.
If you do find yourself subject to an IRS audit, it is best to gather your financial records that you used to prepare your returns and consult a trusted tax professional to guide you through the audit process. The attorneys at The Wilson Firm are prepared to provide you with representation so you don’t have to go into the audit alone and in the dark. Please feel free to reach out to our attorneys if you have any questions related to an ongoing or potential audit.