The word “Audit” is a terrifying word that can strike fear into the hearts of taxpayers.
However, the chances of an Internal Revenue Service audit aren’t that high. According to the I.R.S. 2018 Data Book, the I.R.S. only audited 0.59% of individual tax returns. You can visit IRS.gov and check out statistics or download the 2018 Data Book as a PDF. Let’s get back to discussing audits, both what causes them and how to try and avoid them.
One thing to remember, being audited does not necessarily imply that the I.R.S. suspects wrongdoing. The I.R.S. says that an audit is just a formal review of a tax return to ensure information is being reported according to current tax law and to verify that the information itself is accurate.
Remember, this article is for informational purposes only, and is not a replacement for real-life advice. Make sure to consult your tax, legal, and accounting professionals before modifying your tax strategy.
There are three main methods that the I.R.S. uses to select returns for auditing;
Random Selection. Some returns are chosen at random based on the results of a statistical formula. Just bad luck, the equivalent of winning the lottery in reverse.
Information Matching. The I.R.S. compares reports from payers – W-2 forms from employers, 1099 forms from banks and brokerages, and others – to the returns filed by taxpayers. Those that don’t match may be examined further.
Related Examinations. Some returns are selected for an audit because they involve issues or transactions with other taxpayers whose returns have been selected for examination.
So, what can you do to try and minimize the chances that you are audited? There are several sound tax practices that may help.
Provide Complete Information. Among the most commonly overlooked information is missing Social Security numbers – including those for any dependent children and ex-spouses.
Avoid Math Errors. When the I.R.S. receives a return that contains math errors, it assesses the error and sends a notice without following its normal deficiency procedures.
Match Your Statements. The numbers on any W-2 and 1099 forms must match the returns to which they are tied. Those that don’t match may be flagged for an audit.
Don’t Repeat Mistakes. The I.R.S. remembers those returns it has audited. It may check to make sure past errors aren’t repeated.
Keep Complete Records. This one doesn’t reduce the chance of an audit, but it potentially may make it much easier to comply when the I.R.S. requests documentation.
While it may be inconvenient to get audited, it’s not the end of the world. Being prepared can make the process much less painful and more importantly, less time consuming.
This article is not intended as tax or legal advice and may not be used for the purpose of avoiding any state or federal tax penalties. Please consult a professional with legal or tax experience regarding your situation.