The IRS audits less than 1% of all tax returns. Before you breathe a sigh of relief, that still adds up to about 1 million audits every year. IRS software is helping to automate the process by flagging returns that show abnormalities. Perhaps the return deviates from what’s normally filed, or it’s been linked to a family member or business partner who is being audited, for instance. The more money you make, the more likely you are to be audited as well.
Mail audits are often resolved easily, with just a few line items that need to be proven in writing. Face-to-face audits, including office and field audits, are more complicated and have more at stake (on average, face-to-face audits address discrepancies of around $77,000).
Avoiding these common audit mistakes can help you come out on top. They include:
- Ignoring IRS requests and deadlines. It may be easy to ignore IRS letters, pushing them aside with last week’s junk mail. However, ignoring the IRS won’t stop the agency from taking action. If you ignore the first notice you receive (the IRS will always send the first notice by mail), the IRS will go ahead and make changes to your return, usually adding taxable income or removing deductions or credits that are in question. You’ll receive another letter called a notice of deficiency by certified mail that outlines the new taxes and penalties you owe and gives you a 90-day window of time to file a petition. Ignore the IRS in that timeframe and the IRS will assess the tax, waive your appeal rights, and start collecting the taxes it has determined you owe through federal tax liens, wage garnishments, and levies. A similar process will happen if you miss meetings for face-to-face audits. The audit will be completed without your input.
- Not filing past-due returns. While the IRS has only three years to audit a filed tax return, there is no time limit for auditing years in which a return was never filed. The first step to addressing an audit is to make sure you file all tax returns that are overdue, whether or not you can pay them. If you fail to file, the IRS can prepare and file a substitute return for you. That return, however, will not include the deductions and credits you may be entitled to receive. Fail to file past returns, and you can also risk losing your refund and Social Security benefits as well as your ability to obtain a home, business, or education loan.
- Lying. The most common tax-related lies are underreporting income and claiming false deductions, which can both trigger heavy IRS penalties, fees, and interest capable of soaring well into the hundreds of thousands of dollars. But then there’s tax evasion and tax fraud, which can be criminal offenses that could land you in prison. When an auditor uncovers that you may have committed a cardinal sin like substantially underreporting your income or failing to report foreign bank and financial accounts, you may be heading down a very long, dark path that could cost you dearly. In short: Lying doesn’t pay off.
- Not contesting when there’s a good reason. When you’re audited, the IRS gives you plenty of chances to petition or contest its claims along the way. For face-to-face audits, you can even take action if you don’t like the way the audit is being handled. by speaking with the auditor’s manager. After an audit concludes, you can contest it with the IRS Office of Appeals and have the decision reviewed. If the appeals officer agrees with the auditor, you can go through the court system. Don’t be intimidated. The IRS promises you a right to professional and courteous treatment as well as a right to appeal disagreements. Utilize those rights when it makes sense.
- Not seeking expert help. A qualified CPA can represent you before the IRS in a tax audit. This help is critical because you need someone on your side who knows current tax laws, IRS procedures, and can speak the language of the IRS. They know when and how to petition the tax court, for instance, or whether the penalties you received should be contested. When all else is said and done, a qualified CPA can help you negotiate payment of the tax bill including applying for an offer in compromise, which allows you to settle your tax debt for less than the full amount.
For more information, feel free to contact us.
Image via Pixabay
