In the world of tax prep, audit might as well be a four-letter word. IRS audits are so infamous that they’ve popped up throughout pop culture, everywhere from television to film. And the IRS auditor has become a villain as feared and scorned as Darth Vader.
Let’s take a step back. The perception you have of the IRS audit process is probably vastly different from the reality. Being audited doesn’t mean you’re going to jail, and it doesn’t mean your auditor is out to get you.
But in order to think that way, you need to actually understand the IRS audit. What is an audit, and how does it work? What does an auditor do? What triggers an audit? And what do you do if you get audited?
Today, we’re going to answer all your burning questions.
Let’s start out with a simple audit definition from the Internal Revenue Service.
An IRS audit is 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.”
Simply put, an IRS audit is a review of a person’s or business’s financial information to make sure everything has been reported accurately and appropriately.
And IRS audits happen a lot less than you may think! During fiscal year 2017, around 934,000 tax returns were audited, which was the fewest in nearly 15 years. However, the rate significantly rises with your income, which is one reason why you see so many celebrities, politicians, and athletes being regularly audited.
Even though the overall likelihood of being audited is fairly low, it rises dramatically when you aren’t careful with your accounting or forthright with your reporting to the IRS.
The auditor is the IRS professional who performs your audit. They are authorized to review your records—from pay stubs to bills and anything in between—to ensure what you reported on your taxes is accurate.
An auditor will perform your audit either by mail or in-person interview. By mail, the IRS will send you a written request for specific documents, depending on the issues in your audit. For example, they may ask you to provide receipts related to a certain itemized deduction. Or they might request legal papers relating to a property acquisition or even civil litigation. During an in-person interview, you’ll either meet at an IRS office, your home, your business, or your accountant’s office.
So, why are you being audited in the first place?
Selection for an audit doesn’t necessarily mean there’s a problem. One way the IRS selects who may be audited is by computer screening. Your return is compared against similar returns, and you might be audited if your return is significantly different in some way. For example, the program might flag your return if you co-own a small flower shop and report making $600,000.
You also could be flagged for an audit if you’ve done business with another taxpayer whose return was selected for an audit. The co-owner of this flower shop could be audited, as well, even if they reported income of $60,000—because the IRS now wants to verify the origin of that $600,000.
An experienced auditor will take a look at the return and will either accept it or send it to another examining group for review.
First of all, don’t panic. You know by now that an audit isn’t the end of the world. Hopefully, an audit just means the IRS wants to double-check your return and fill in any gaps.
However, whether or not your audit will reveal you missed something significant on your taxes, you need to take it seriously. A good first step happens to be one you can take year-round: Keep good records of your transactions, accounts, and paperwork.
Your next step should be to get in touch with a professional. If you work with an accountant, they should have a clear record of your financial information. You should also reach out to an audit defense expert. Representing yourself in an IRS audit can be costly, and unless you’ve handled audit proceedings before, you’ll be at a disadvantage.
Yes, being audited by the IRS is scary. But it doesn’t have to be! Now that you have a basic audit definition and know how audits work, what an auditor does, and how to proceed if you’re audited, you can turn that fear into a healthy respect.
Keep a thorough record of your finances, become a stickler for the details—and should an audit ever come, you can tackle it with confidence.
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