How to Avoid an IRS Audit – Advice from a Tax Attorney
An IRS audit is a review/examination of an organization’s or individual’s accounts and financial information to ensure information is being reported correctly, according to the tax laws, to verify the amount of tax reported is accurate.
Publication 556, Examination of Returns, Appeal Rights and Claims for Refund explains the audit process in more detail.
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How the IRS selects returns for Audit
- Selecting a return for audit does not always suggest that an error has been made. Returns are selected using a variety of methods, including:
- Random selection and computer screening – sometimes returns are selected based solely on a statistical formula.
- Document matching – when payor records, such as Forms W-2 or Form 1099, don’t match the information reported.
- Reported by Individual – Individuals can report a taxpayer for tax fraud. If someone has knowledge of tax fraud they can report that fraud to the IRS and receive a reward if the taxpayer is found to have a tax deficiency.
- Related examinations – returns may be selected for audit when they involve issues or transactions with other taxpayers, such as business partners or investors, whose returns were selected for audit.
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Your Rights During an Audit
Don’t let the IRS scare you during an audit. You have several rights as a taxpayer, the first step you should take is talk to an experienced tax attorney who can analyze your specific situation. An experienced tax attorney can review your situation and at times even get you money back after an audit. The auditor has to change your return to reflect the proper tax amount. If your previous tax preparer missed deductions or failed to include your proper credits the auditor has to amend your tax return and give you a refund.
- A right to professional and courteous treatment by IRS employees.
- A right to privacy and confidentiality about tax matters.
- A right to know why the IRS is asking for information, how the IRS will use it and what will happen if the requested information is not provided.
- A right to representation, by oneself or an authorized representative.
- A right to appeal disagreements, both within the IRS and before the courts.
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How to Avoid an IRS Audit
There is no sure way to avoid an IRS audit but there are strategies to help reduce the chances of being selected.
- Include all income reported to you on forms 1099. The IRS receives copies of 1099’s sent by payors examples include: banks, financial institutions, independent contractor payors, Casinos reporting gaming winnings and escrow agents reporting land sales.
- Double check social security numbers for dependents. The IRS checks the social security numbers of dependents to make sure they are not claimed on another persons tax return. An audit is guaranteed if more than one person is claiming the same dependent.
- Claiming unreasonable travel expenses, moving costs or charitable deductions. The IRS uses statistical analysis to determine who they audit and they love to audit these accounts because often taxpayers exaggerate these expenses. Don’t get greedy and stretch your travel and entertainment expenses, you are just increasing your chances of an audit.
- If you own a business try not to claim losses for several years in a row. This is a red flag for the IRS because it usually means the taxpayer is either claiming a hobby is a business or is overestimating expenses. Obviously sometimes businesses do operate at a loss especially in the first couple years of operating but if the business continues to lose money why is the taxpayer still running and business and where is he/she getting the money to pay their expenses. If you have a business that continually loses money ask yourself whether or not it is truly a business or are you just trying to move hobby expenses into deductible tax expenses.
- Incorrect tax returns and calculation errors. If the return has calculation errors then other information on the return is likely wrong. To avoid calculation errors efile your tax return. Computer programs help check for simple arithmetic errors that are likely to happen when preparing returns by hand.
- Use a CPA or Tax Attorney to prepare your taxes. The IRS agents are influenced just like you or I would be with the quality of your tax preparer. After an agent reviews your return they are more likely to audit an individual preparing his own taxes then a taxpayer who has their return professionally prepared by a tax attorney or CPA.
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What are the Chances my Return is Audited?
If you make under 100,000 you have less than a 1% chance of being selected for an IRS audit. If you make between 100,000 and 200,000 your chances of an IRS audit are about 3% and if you make over a million your chances are about 10% of being audited. Therefore, most taxpayers have a very slim chance of being audited, make sure to follow the simple rules above to help make sure you are not one of the unlucky taxpayers selected for an Audit.
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IRS Circular 230 Notice: To ensure compliance with requirements now imposed by the Internal Revenue Service of the U.S. Treasury Department, we are hereby informing you that any federal tax advice contained or perceived contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code; or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this communication.
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