I DON’T WANT AN AUDIT

If you have ever received one of those envelopes with a return address of Internal Revenue Service, your
heart probably sank, thinking why are they contacting me? When you open the letter, you’re typically
being asked a specific question about something that was on, or not on, your tax return. Yes, it’s an “audit”
and you need to provide the information requested.
But what triggers an audit? Actually, filing a tax return triggers a mini audit because every return is
compared to known information provided to the IRS, like copies of W‐2’s and 1099’s. Many of these IRS
letters are generated because something the IRS expected to see on your return, like checking account
interest, income from a second job, or stock sales, is not reported on the return and the IRS wants to know
why. Often you may have just overlooked reporting the item, or maybe you did report it, but the IRS didn’t
realize it’s there. In either case, responding to the notice is your first priority. If you overlooked it, fess up
and pay what you owe. Often the notice has an amount you owe if you agree with the notice, and simply
paying the amount of the notice will close the issue.
What if you disagree with the letter? Again, responding to the notice should be your first priority. But this
time you explain why you disagree. Give them details of why you disagree and provide additional forms
or documentation if you think it’s necessary. I also recommend that you mail your response certified with
delivery confirmation.
So, everyone is audited technically. If you are reporting all your income and deductions correctly, you
should not have a worry about having to respond to an audit request. But some items are more likely to
trigger an investigation. Generally, the more you make, the more likely you are to be audited. Recent
statistics said that one in one hundred and seventy returns are chosen for audit, while incomes between
$200,000 and $1,000,000 are more than twice as likely to be examined, and incomes over $1,000,000 are
four times as likely to be examined. It doesn’t mean you should make less, just be prepared.
Besides the times where the IRS has a W‐2 or 1099 that you didn’t report, generally an audit is a random
look to see if anything is incorrectly reported. The IRS uses statistical analysis to pick random taxpayers
for audit. Higher income generally means more opportunities for errors, thus the higher audit rate as your
income rises. The same goes for deductions. The criteria for picking returns for audit is a closely guarded
secret but generally anything out of the ordinary will raise a red flag. If your deductions are
disproportionately large for your income, your return could be picked for audit. That doesn’t mean you’ve
done something wrong. If everything is properly reported, nothing will be changed. But be prepared to
show all your documentation and receipts to prove your case. Don’t omit a legitimate deduction just
because you’re afraid of an audit. If you’re entitled to the deduction, you’ll be fine.
Just running a business increases your audit odds because statistically, there are more ways for self‐
employed people to incorrectly report their income. There are some that intentionally report things
incorrectly, but even folks not looking to push the envelope can make mistakes. Whether intentional or
not, if you’ve made a mistake, the best response is to admit your mistake. The consequences are generally
much easier to handle if you admit you made a mistake.
There are plenty of other audit red flags. The reason they’re red flags is because the IRS has found a lot of
taxpayers making mistakes, so these are the best places for them to get additional tax dollars. If you’re
intentionally trying to misrepresent an item on your tax return, be aware that the IRS is always looking,
and they are getting better at spotting under reporters. But if you’ve just made a mistake, admit it. If you
discover the mistake before the IRS does, you can always correct your previously filed return by amending
your return. In most cases, once the item is corrected, you pay the tax, and interest, and you won’t hear
anything else.
If you have questions about whether an item could trigger a red flag, or if you are being audited and need
help responding to the IRS, please contact our office for assistance. As always, I am looking for article
ideas that you would like me to cover. If you have an idea for a future article, or just have a topic you
would like more information on, please send me an email.