It’s considered by many taxpayers to be one of the most frightening events that could happen related to their everyday business affairs. What is this frightening event? An IRS audit, of course. But is a tax audit really that scary in real life? The numbers reveal that only 1% of all taxpayers experience an audit, and of this one percent, about one in five result in a meeting with the IRS.
Presently, the IRS audits half as many taxpayers as it did five years ago. However, the amount of tax recovered per audit has increased. The IRS uses an elaborate computer selection process, auditing only those returns which will almost certainly yield some adjustment.
The IRS conducted the majority of FY 2014 audits, 71 percent, via correspondence. The remaining 29 percent were conducted in the field. Of the almost 1.4 million examinations of tax returns, approximately 33,000 taxpayers did not agree with the IRS examiner’s determination, amounting to a disputed or “unagreed” recommended additional tax of about $14.1 billion
Just under 190 million returns were filed in the calendar year, 2013. According to the 2014 IRS Data Book, the IRS audited a total of almost 1.4 million tax returns, approximately 0.7 percent of all returns filed in Calendar Year (CY) 2013. This was the lowest number of audits in five years. The IRS audited 0.9 percent of all individual income tax returns filed in CY 2013, and 1.3 percent of corporation income tax returns (excluding S corporation returns). In 2015, the IRS audited 0.84% on individual taxpayers. Revenue from audits dropped by 41% to $7.3 billion.
Of significance is that the average taxpayer is not the typical target of IRS auditors. Taxpayers making less than $200,000 had a 0.88 percent of being audited, a decrease from the 0.94 percent audit rate in fiscal year 2012. A taxpayer’s audit odds increased if income was between $200,000 and $1 million. 3.26% of such individuals were audited in fiscal year 2013, more than three times the average. 11% of taxpayers making more than $1 million were audited, albeit at a lower percentage than in 2013. Still, it’s not hard to figure that a millionaire is ten times more likely to be audited than someone making less than $200,000.
In an audit it is important, of course, to minimize the further financial obligation likely to result. But it is also important to refrain from leaving “red flags” so as to prevent the IRS from investigating beyond the original scope of the audit. If you are audited, there are several things a taxpayer can do to improve his or her chances of surviving the audit. In an audit, you must convince the IRS that you reported all of your income and were entitled to any credits, deductions, and exemptions that are questioned.
- Diligently prepare and, if necessary, reconstruct your records. If you are missing receipts or other documents, you are allowed to reconstruct records.
- Do the research. Study and know the relevant legal tax legal issues, especially by using free IRS publications. If you are still unclear about anything, consult a tax professional.
- Know your rights. Review IRS publication 1, explaining the Taxpayers’ Bill of Rights, prior to your audit. If you feel that the audit is progressing badly, demand a recess and consult a tax professional, especially if tax fraud is mentioned.
- Use time to your advantage. Postponing the audit usually works to your advantage. Request more time whenever you need it to get your records in order, or for any other reason. The IRS must complete an audit within three years of the time the tax return is filed, unless the IRS finds tax fraud or a significant underreporting of income or you consent to extend the time for the audit.
- Meet with the IRS at an IRS office, not at your home. Keep the IRS from holding the audit at your business or home. Instead, go to the IRS or enlist a tax professional to handle it. Field audits, which are usually at a taxpayer’s place of business, are used mainly when there is business income issue. Taxpayers should always consult a tax professional before hosting a field audit.
- Don’t volunteer information, only provide information which answers the IRS’ inquiry. Provide only the information which is requested. Do not volunteer superfluous information. Only bring specified requested documentation, including tax returns, to any examination.
- Appeal any unfavorable results. Even after the ruling, try to compromise with the IRS. Otherwise, appeal the ruling with the assistance of an experienced tax attorney.
If you do not agree with the outcome of the audit, you may appeal or challenge the determination in the US Tax Court, within the period indicated on the determination letter.
Don’t expect that you are not going to have an increased tax obligation resulting from your audit. You can negotiate with the auditor but it is advisable to enlist the aid of a tax professional, call the Thorgood Law Firm www.thorgoodlaw.com. For a FREE consultation, call 212-490-0704.
