There are a few things in life that cause a universal, often paralyzing, sense of dread. A family call in the middle of the night. Knowing you must have a difficult conversation with someone. An IRS letter saying you are being audited.
While we can’t offer much relief for the first two, we can help calm your nerves about the third. Of course no one relishes the idea of an IRS audit, but there are things you can do to make it as easy as possible. And keep in mind, most selections are computer generated randomly, so it doesn’t necessarily mean anything is wrong.
First, a few facts…
- In 2017, the IRS audited just fewer than one million tax returns, which is only one-half of one percent of all returns filed that year. This included .6% of all individual income tax returns and .9% of corporate income tax returns (excluding S corporation returns).
- Of the tax return audits, almost 30,000 resulted in additional refunds to the taxpayer totaling more than $6 billion.
So your likelihood of being audited is really quite low on the grand scale, but there are a few red flags that increase your chances. It is still rather low, but below are a few things that make your probability higher than average.
- You make over $200,000, or even more so, over $1 million.
- You don’t report all of your taxable income.
- You run a business, particularly a cash-intensive one.
- You have much higher than average charitable donations for your income level.
- You claim a business loss for something that is really a hobby.
- You write off a lot of business meals, travel or entertainment expenses.
If you do receive an audit letter either randomly or because of something specific on your return, take a deep breath and don’t panic. But don’t ignore it either in hopes it will go away. You have 30 days to respond to an audit letter, and if you don’t, eventually the IRS will simply start collecting taxes on what they assume is owed and you won’t have any right to an appeal.
First off, call us to help. We have helped many clients in this situation and know how to respond properly. Next, you will likely need to get started gathering the information requested in the letter (it will tell you what specifically is being examined), which can include receipts, bills, canceled checks, legal papers, loan agreements and a variety of other documentation. Once this is gathered, make copies to send to the IRS since you want to keep the originals for your own files.
Once the IRS has all the information they need (and nothing more than they requested), they will begin their audit. There is no way to determine how long it will take, so hang tight. Once they are done with it and you receive your report, you can either agree with it and pay the amount due (or receive a refund), or you can request a review from the IRS Appeals Division.
While it isn’t fun, it is a clear cut process and one that we can help you through. One final note, you will NEVER be notified of an audit by phone or email, only by mail so don’t fall for scams. You can also report any such scams to the IRS by forwarding information to firstname.lastname@example.org.