Why Am I Being Selected For An Irs Tax Audit?

When you are selected for an audit, it does not necessarily mean that there is a problem. There can be several different methods the IRS uses to select individuals for an audit, including:

Random Selection: Sometimes you may be selected for an audit based on pure random chance. This is done through a computer screening and most of the time does not indicate you have done something wrong.
Related Examinations: You may be selected for an audit if there is a discrepancy or issue between your returns and the returns of other taxpayers. This is typically the case for business partners or investors whose partner’s return has been chosen for an audit.

What Are Your Odds Of Being Audited By The IRS?

As mentioned above, being selected for an audit does not always mean there is something wrong with your returns. But what is the exact chance of you being audited by the IRS? The New York Post reports that the odds of being audited in recent years have fallen to just .5%. However, this can be affected by various factors such as your level and type of income. People earning over $1M and those with income from a sole proprietorship, rental properties, partnerships, etc. have a higher chance of being audited.

How an IRS Tax Audit Works

A taxpayer files an income tax return. Let’s say their 1040 Form for 2017, filed in early 2018. Within a couple years of filing that return, the IRS may decide to audit the tax return.
An IRS Tax Audit means they will review and substantiate the correctness of the entries on the tax return items, such as the income and the deductions.
The audit process takes 2-3 months. The taxpayer receives an Audit Notice in the mail. This is where we help in being the ones who communicates on the taxpayer’s behalf with the Tax Examiner.
After the Examiner completes his/her findings, a report is drafted. The Taxpayer has 30 days to accept or reject the findings. If we reject the findings, we reject it with the examiner and his/her supervisor. We are essentially protesting the proposed deficiency and appealing it internally with the examiner and his/her boss. If we do not come to a resolution on the deficiency amount, the IRS will then issue a Notice of Deficiency.
This Notice of Deficiency gives the Taxpayer 90 days to challenge the final findings by petitioning the Tax Court and even possibly pursuing additional appeals. The goal is always to reach an agreement so a final assessment can be made.
Once a final assessment is made, the taxpayer needs to pursue payment options, such as an OIC or Installment Agreement because the next phase begins: the collection phase.

What Happens If You Get Audited?

Most individuals think that getting audited is an extremely stressful process where you’ll be interrogated by an IRS agent for hours on end. That is simply not the case. In fact, the IRS reports that about 75% of tax audits for the fiscal year 2018 were conducted by mail.

If the auditor has additional questions or needs to see additional documentation, they may request one of these audit options:

In-Office Tax Audits: These are audits conducted at your local IRS office. You are typically required to bring additional documents and an explanation of these documents. Although not necessary, you can bring an accountant or attorney along for your representation.
Field Audits: Field audits are audits conducted at your home or place of work. An IRS agent will visit you to investigate your return. These are typically only for returns that raise many questions or have multiple issues that need further explanation from the taxpayer.

Tax Return Audit Process

Any IRS Tax Audit starts with a letter of notification via mail to the taxpayer. The letter contains detailed information on your specific tax return audit process, why you are being audited, and further instructions including a deadline to reply to the letter. The process may differ based on whether you are selected for an audit by mail or an in-person audit.

Process for IRS Audit by Mail – Remember, this is what happens in ¾ of all IRS audits. IRS requests written information about the return or asks for additional documentation. Taxpayer returns requested information or documentation by mail. IRS sends you their report with final instructions for completing the audit
Process for In-Person IRS Audit –This is most common for individuals or businesses earning more than $1M. IRS sends notice of the in-person audit with an assigned time, location, and method of interview. IRS agent visits the taxpayer at their home or place of work for an interview and to review additional requested documentation (It’s a good idea to bring a tax accountant or tax attorney to these interviews). IRS agent provides a report of findings with final instructions for completing the audit

What to Expect During an Audit

An audit is conducted when the IRS requires additional information from the taxpayer to justify their returns. Therefore, you can expect to be asked for additional documents such as receipts or to answer questions the auditor may have about your return. Regardless, it is in the taxpayer’s best interests to have documentation ready if they are notified of an audit.

What to Do If You Receive an IRS Tax Audit Notice

If you receive an IRS Tax audit notice, the best thing to do is to read the audit notice carefully and follow the exact procedure. The notification will typically outline why you are being audited, what you are being audited for, and how you are being audited. If you are being audited via mail, be sure to provide the exact documentation that the IRS is requesting, and to answer all the questions they have regarding your return. If you are facing an in-person audit, contact your accountant or tax advisor who helped prepare your return, and perhaps even a tax attorney to represent you.

IRS Tax Audit Penalties: What You Should Know

There is a wide variety of tax audit penalties that can be assigned after an audit is conducted. This includes penalties for understating your taxes, overstating pension liabilities, and understating gifts or estates. The penalties all vary depending on your income, the discrepancy between how much you filed for returns and how much the auditor has changed the amount to, and more.

Regardless, it is in your best interest to pay the due taxes in a timely manner. Should you disagree with the results of your audit, you can request an audit reconsideration before you pay any taxes, penalties or interests that you plan to dispute. If you have paid your taxes or penalties but have decided to disagree with the result after, you can request a refund. If your request for an audit reconsideration is denied, you can request an offer in compromise. Although with a low chance, this settles your tax obligation for a fraction of the actual amount owed.

How Far Back Can the IRS Go to Audit My Return?

The IRS reviews up to 2 years worth of tax returns in a typical audit. If the audit uncovers major errors or discrepancies, the scope of investigation may increase to 3 or more years. The IRS does not look back past 6 years.

What Are My Rights During an IRS Audit?

As stated on the IRS website, you have the following rights if you get audited:

Right to be informed
Right to quality service
Right to pay no more than the correct amount of tax
Right to challenge the IRS’s position and be heard
Appeals an IRS decision in and independent forum
Right to finality
Right to privacy
Right to confidentiality
Right to retain representation
Right to a fair and just tax system

What Are the Possible IRS Tax Audit Penalties?

In approximately 3% of cases (about 300,000 people) the taxpayer receives an additional refund from the IRS. The rest of the time, taxpayers will be required to pay the tax difference between their original and audited tax returns along with any associated IRS penalties and interest.

There are a wide variety of tax audit penalties that can be assigned after an audit is conducted. This includes penalties for understating your taxes, overstating pension liabilities, and understating gifts or estates. The amount of the penalty will vary depending on your income, the discrepancy between returns, and other factors. In 2018, the average penalty in a by-mail audit was $6,356 while in-person audits resulted in approximately $26,307 in penalties.

Should I Pay the IRS Penalties?

Yes, in most cases it is in your best interest to pay any assessed tax penalties in a timely manner. However, you do have the option to dispute the findings of your audit and the changes made to your tax return.

In that case, you can request an Audit Reconsideration before you pay any taxes, penalties, or interest that you plan to dispute. If you already paid the penalty and then decide to disagree with the audit results, you can request a refund along with the Audit Reconsideration. If your Audit Reconsideration request is denied, you can request an Offer in Compromise. Although there is a low chance of the IRS issuing this, an Offer in Compromise settles your tax obligation for a fraction of the actual amount owed.

IRS Tax Audit