Tax Audits: Your 10 Biggest Questions Answered
How likely one is, how long they last and how much you could owe
(The article, The Answers to Your 10 Biggest Questions About Tax Audits, originally appeared on GoBankingRates.com.)
The very mention of a tax audit can conjure dread in the heart of even the most diligent, honest taxpayer.
The perception is that, without warning, a knock at the front door of your home or office could bring with it a team of suited, briefcase-carrying, Secret Service-looking types, who quickly commandeer and confiscate you and everything related to the taxes you just filed.
While this might resemble something from our worst tax nightmares, in reality, this scenario is one of the biggest fictions when it comes to your taxes.
Who Really Gets Audited by the IRS
Audits not only play out in an entirely different way, but they’re rarer than you think. According to CNN Money, your chances of being selected for one are about 1 in 100.
That doesn’t mean you shouldn’t stay prepared in case the Internal Revenue Service (IRS) does want to have a word with you about your tax return.
Below, we’ve answered 10 of the most common tax audit questions to give you better peace of mind:
1. Why would the IRS want to audit me?
“Selecting a return for audit does not always suggest that an error has been made,” according to the IRS. Most of the time, audits are a matter of amending oversights.
Many tax returns are selected for audit through a random, computer-selected process; when W-2s and 1099s haven’t matched up or if your return might be associated with another audit, like one of a business partner.
Reporting large charitable donations or business expenses, according to Investopedia, can also trigger audit “red flags.” But even those need to be super conspicuous. “Someone making $60,000 a year with $30,000 in charitable donation claims might raise some eyebrows at the IRS,” said Donna Fuscaldo of FOX Business.
2. Does my income increase my tax audit likelihood?
It does, but only if you’re earning millions. Recent statistics from the IRS show that there’s only a 1 percent probability of being selected for audit if you earn $200,000 a year or less.
It’s the individuals earning $1 million or more annually who have an increased likelihood of being audited. Abusive tax shelters and corporations are often more scrutinized by the IRS as well.
(MORE: A Low-Income Tax Reform Agenda)
3. Are there different types of audits, and am I notified beforehand?
The IRS will mail you a notice of an audit.
“Sometimes called a paper or correspondence audit, you’ll be asked to send additional documentation to back up claims that you may have made,” said Kelly Phillips Erb of DailyFinance. “Requests could include receipts or canceled checks for charitable donations or mileage logs for business travel.”
There are two additional, in-person audits that could occur. In an interview audit, you’re summoned to an IRS office. With a field audit, an IRS agent will visit your home or business.
According to recent IRS data, only 22 percent of people audited were required to appear in person; the remaining 78 percent went no further than mail correspondence.
4. If I ignore the audit notice, will the IRS go away?
No, but doing so will give the IRS reason to think you have something to hide, and that could prompt an immediate investigation, penalties and fines or even a court order forcing you to cooperate.
“Shoving the letter you get from the IRS in a drawer and pretending it’s not there won’t make it go away,” according to CNN Money. “You’re usually given 30 days to respond, so make sure to write back promptly or certain items may be disallowed or automatically corrected.”
5. Is the IRS only allowed to audit my most recent tax return?
No — the IRS has up to three years to pursue an audit, so if there’s any doubt over your recent tax returns (by you or the IRS), a taxpayer isn’t off the hook just because the calendar year changes.
“That just-received letter (in 2014) could be from your 2011 taxes, which is why you should keep tax documents for at least three years,” Fuscaldo said.
6. What kinds of documentation will I need to provide the IRS?
Only provide what the IRS requests. Anything more could unnecessarily broaden the scope of your audit. Trace your steps if there’s paperwork that’s unaccounted for. Duplicate copies of receipts can easily be pulled for many records, like those for medical expenses or charitable donations.
7. Should I have an attorney present at my audit?
Having a tax attorney (or a CPA) at your audit isn’t mandatory, but it could help, if you’re willing to pay their fees.
Like with any legal concern, let your attorney do the talking for you; volunteering extra information might compromise your advantage —and even open up a new investigation where one isn’t warranted.
If hiring an attorney is cost-prohibitive, experts recommended reading IRS Publication 1, widely known as the “Taxpayer Bill of Rights.”
8. How long will the audit last?
The duration of a tax audit can vary, but experts advise conservatively setting aside a full day with your agent.
“The length of time an agent will be at your home or business depends on a number of factors, including the complexity of the issues presented and how organized you are with respect to your financial records,” Erb said.
If more time or a follow-up is needed, you’ll be notified. You’re also given the chance to make an audio recording of the audit proceedings, notes Investopedia, provided you give the IRS a 10-day notice. Video recordings are prohibited.
9. What kind of penalties could I be liable for?
In the event the IRS determines you’ve underpaid your taxes, you could face one or more penalties, including:
A 20 percent penalty imposed for any “tax underpayment associated with overvaluation or undervaluation of property, negligence, disregard of IRS rules and regulations, and substantial understatement of tax liability.”
A 75 percent penalty for serious tax underpayments that are fraud related. Note that it’s the burden of the taxpayer to prove otherwise.
Interest payments for violations deemed to be due to fraud or negligence, failing to file on time or incorrectly valuing your property. Your payments, with interest added, begin from your return’s due date.
Prison, but only in the most severe examples of tax evasions.
10. Can I appeal the outcome of an audit?
If one of the above penalties applies and you’re unhappy with your audit report, you do have recourse. Audited taxpayers can send the IRS an appeal letter within 30 days of the audit proceedings; an appeals officer unaffiliated with your audit will be assigned as the person to whom you can plead your case.
If your appeal is denied, filing a petition in U.S. Tax Court is your remaining avenue: small claims for tax bills less than $50,000 and regular tax court for amounts greater than $50,000.
As always, you have the choice of being represented by an attorney or going solo. The good news? Statistics show that 14 percent of self-appealing taxpayers win their cases, 20 percent with an attorney.
Paul Sisolak is a writer for Go Banking Rates, where he publishes articles about personal finance, business and consumer trends and fiscal frugality.