Math errors, the concealment of income, the exaggeration of deductions and round numbers can raise the red flag. Many or all of the products shown here are from our partners who compensate us. This can influence the products we write about and where and how the product appears on a page. Probably one of the main triggers for the IRS audit is a major change in revenues.
Of course, there are a lot of unexpected events in life that can cause changes in income, such as the loss of a job, a windfall, or simply unexpected good or bad luck in life. At the beginning of each year, you should receive a copy of all applicable W-2 and 1099 forms, which detail all of your income from the previous year. The IRS also receives this information. If your return doesn't include any of the income listed on those W-2 and 1099 forms, the IRS computer marks your return and it's very likely that an audit will be performed.
Giving feels good, but as far as the IRS is concerned, giving too much may seem suspicious. If your charitable donations far exceed the average (usually around 3% of your total income), your return may be marked. Electronic filing reduces these errors by extracting a lot of information from previous returns and allowing you to upload your W-2 or 1099 forms directly into the system. In the past, they were only 50% deductible; now you can claim 100% of the cost of a business meal, but you have to document who you're with, what the purpose of the meeting was, the date of the meal, etc., Greene-Lewis said.
What scares people most is an exam audit, but less than 1% of Americans are audited in any given fiscal year, Willetts said. Usually, the IRS says, “If you have the documents, send them to us. Every year, the IRS sends thousands of notices to taxpayers informing them that they have been selected for an IRS audit. An IRS audit lawyer knows this and does everything possible to ensure that the audit remains under the client's control.
In 1998, Taxpayer Bill of Rights III called for changes in the type of customer service solutions that the IRS must provide to both taxpayers and audited taxpayers. However, if the misstatement of your income seems intentional and not wrong, your tax return will likely be flagged for auditing. Generally, the IRS can audit returns filed in the past three years, but there are some situations where the IRS can audit even older returns. The IRS is not going to waste its time on an audit unless agents are reasonably sure that the taxpayer owes additional taxes and there is a good chance that the IRS will be able to collect that money.
However, the letter should not lead to a full audit if you simply accept the income adjustment and pay the associated tax. If the taxpayer or representative doesn't agree with the report, they can submit additional documentation or work to clarify things in the audit report. If you don't keep business expenses separate from your personal finances, not only will you hinder the tax preparation process, but you'll also greatly increase the risk of being audited. While the IRS accepts most tax returns when they are filed, there are circumstances that warrant an audit based on this data point system.
In an IRS office audit, the revenue agent will ask the taxpayer to come and analyze their tax return and to bring supporting documents. Keep the auditor focused on the main objective and have all your information available and in a format that makes it easier for the auditor to work. More information on extending a statute of limitations can be found in Publication 1035, Extending the Tax Assessment Period (PDF), or in your auditor. If you agree with the findings of the audit, you will be asked to sign the examination report or a similar form, depending on the type of audit performed.
If you receive a letter stating that the IRS is conducting an examination audit, you may want to seek the help of a professional, he added. .