Are You Being Audited?
Have you ever been audited by the IRS? Have you ever wondered about what you would do if you were? Are you scared?
First of all, never be scared of an Audit; unless of course, you have been hiding your true income amounts over the past years -then you can be scared.
For the most part, the best defense against an Audit is a good Offense. In this case, you Offense is Preparation. Preparation is key when positioning yourself to defend an Audit before one even starts.
We have all seen the advertisements and heard the radio ads; and to be honest, if you are currently lying on your tax returns and not claiming all of your income, then you have every right to be scared…because you should be.
There are serious penalties for as they say, “falsifying your tax returns”. Monetary fines and Jail time are the primary ones; not to mention the amount of back taxes you will owe in the event they are able to identify income that you failed to claim and subsequently failed to pay tax on.
What? When? Who? & Why?
Typically the IRS will initiate a tax audit based on the contents of a tax payer’s tax return. If you made $150,000 dollars last year and you only paid $5,000 to $10,000 in taxes, something obviously isn’t adding up properly. You will likely receive a formal letter in the mail which will require your response within a certain period of time. (We highly recommend answering immediately in the effort to avoid any additional fees or fines that may be placed against you if they find additional income that you should have reported)
* What many people don’t know is how they are selected for the audit compared to the millions of other people paying their taxes like they are supposed to. Well, here is a little insight from the ITC on how you might be selected for audit:
# Like any good CPA (Certified Public Accountant) or Accounting Firm, the IRS and the government have their own internal systems in place that provide a “rating” to any given tax return based upon their contents.
# First, they use a program that takes the income reported on your tax return and compare or “match” it against the forms that they have which detail any wages paid or other income paid from the Payor (person issuing your check - Employer, Investment firm, etc)
# Second, they will assign a certain rank or score to your return that is based on a wide ranging comparison to other tax returns filed by individuals residing in the same or similar income bracket. They compare the returns using a in-house program that will examine everything you report under your deductions, tax credits, expenses, etc (even down to the mileage claimed on your automobile and money you gave to your church!). Everything you claim that brings down your tax liability is compared against similar returns.
Who is typically Audited?
There are between 1 million and 2 million audits conducted every year. Of that amount, a large percentage of them are done so against tax payers who generally make less than $60-65,000 dollars.
Why are they auditing so many people?
Currently, in light of the financial situation that our economy is, the government is looking for every last dollar that is due or may be due to them.
They have released to the public that there is over 250 BILLION dollars owed to them in either unpaid taxes or underpaid taxes. So, like any good company, they are trying to get their money because they need it to pay for other things.
When Do Tax Audits typically Take Place?
The best answer is - you never really know. Audits take place year round. So technically, the IRS can contact you at any time they please. Traditionally, they won’t reach out to taxpayers any earlier than 12 months out from the date your return is due; and no later than three (3) years after your filing date.
Where do I have to go if I receive notice that I am getting Audited?
Well, the good news here is that 75% of tax audits will occur through the mail. However, occasionally an IRS representative will schedule an appointment on-site. On-site could mean that they are coming to your location or office, or, you will be going to their office with all of your information and supporting documentation.
ITC Bottom Line:
If you get audited, the first thing you need to do is talk to a Tax Professional. (Feel free to search our localized partner database of tax professionals in your area HERE) Next, make sure you have your affairs in order; for example, all of your documentation, receipts, and any other documents that you need to support your reasoning behind the information on your tax return. Income, deductions, credits, etc. As long as you didn’t claim something you were not supposed to - like a tax credit that increased your refund, or a deduction that really should not have been applied, or a failure to report income form an employer or third party (self-employed), then you should be fine.
Until next time….SAVE YOUR RECEIPTS.