Receiving any notification from the IRS can be stressful, but receiving a notice that you’re being audited is enough to make anyone panic. The IRS conducts audits for any number of reasons — and not necessarily because you have done anything wrong. However, even if you are sure that you have nothing to worry about, you still need to take an IRS audit seriously and consider hiring a tax attorney if you think there is anything the IRS could misconstrue.
In this article, we’ll provide a little background on why the IRS may have chosen you for further scrutiny and then offer six tips for surviving your tax audit.
Red Flags for the IRS: Why Am I Being Audited?
Before we get into how to survive a tax audit, let’s talk about why you’re under investigation in the first place. There are a variety of red flags the IRS looks for on tax returns that signal them to select you for an audit. Typically, your return will be flagged if the information you provided falls outside of their expectations. But remember, just because the IRS is auditing you doesn’t mean that you’ve done anything wrong, only that they believe you might have. In this regard, don’t go out of your way to avoid the red flags listed below, but be aware that they might be the reason for your audit.
- Claiming 100% business use of a vehicle
- Taking an early IRA or 401k payout
- Unusual schedule C reports
- Large foreign currency transactions
- Extensive charitable donations
- High rental property income or losses
- Claiming earned income credit
The IRS will mail you a notice of your audit that should explain why they are auditing you. If you are confused by their explanation for the review or believe they have made a mistake, contact a tax attorney before replying to the notice or agreeing to meet.
6 Steps to Surviving a Tax Audit in 2019
1. Take Time to Prepare for Your Tax Audit
Do not contact the IRS immediately after receiving an audit notice. You’ll likely have around 30 days until you need to respond, which gives you plenty of time to contact a tax attorney and prepare supporting documentation. The documentation you need will depend on what the IRS is investigating and will likely include:
- Receipts and bills
- Legal papers
- Loan agreements
- Medical documents
- Proof of employment
- Mileage logs
2. Avoid Hosting the Tax Audit
If the IRS requests that you respond in-person to their audit, try to avoid having them do a field visit to your home or place of business. Instead, see if they can conduct the meeting from their own office or that of your accountant or tax attorney. Permitting the IRS access to your business or home might allow them to see something that reinforces their conviction that you have done something wrong.
3. Be Concise and Precise
Do not offer any information that the IRS agent does not specifically ask of you, but make sure the information you do provide is both truthful and detailed. The more detailed information you provide, the more confidence you will instill. However, providing additional information could give them something to use against you that they otherwise wouldn’t have known to ask.
4. Defend Your Position, But Don’t Argue with an IRS Agent
Don’t say you did or didn’t do something unless you can prove it. Don’t try to argue how much taxes you owe, but if you feel like you should have a disallowance or deduction, defend your position. Try to negotiate your options without coming across as defensive or argumentative. A tax attorney can be a significant asset in helping you walk the line between being difficult and letting the IRS take advantage of you.
5. Understand Your Rights During a Tax Audit
You have rights as a taxpayer and can find the official IRS publication detailing all of those rights here. One of the most useful privileges on the list is the right to retain representation in all dealings with the IRS, including when you are undergoing an audit. Another essential right includes being able to challenge and appeal an IRS decision.
6. Work With a Tax Attorney During a Tax Audit
It is always best to work with a tax attorney from the very beginning of an IRS audit to be as prepared as possible for anything they might throw at you. However, if you try to go it alone and decide later during an in-person audit that this is more than you can take care of on your own, you can call a recess and quickly contact your tax attorney for advice.
Need Help Surviving Your Audit? Contact S.H. Block Tax Services
If you have any questions or concerns about an impending tax audit, please contact the tax attorneys at S.H. Block Tax Services. Our skilled attorneys have experience working with the IRS to resolve tax issues and protect taxpayers’ rights.
Schedule your free consultation today by calling(410) 872-8376or completing the brief contact form to the right.
The content provided here is for informational purposes only and should not be construed as legal advice on any subject.
FAQs
How to avoid a tax audit
- Be careful about reporting all of your expenses.
- Itemize tax deductions.
- Provide appropriate detail.
- File on time.
- Avoid amending returns.
- Check your math.
- Don't use round numbers.
- Don't make excessive deductions.
You can't always avoid an audit, but thorough records that support your deductions can quickly appease most auditors. Have supporting documentation for any deduction on your tax return, especially those that are significant or subject to special rules, such as rental losses.
How do you survive a tax audit? ›
Checklist: How to Survive a Tax Audit
- Delay the audit. Postponing the audit usually works to your advantage. ...
- Don't host the audit. Keep the IRS from holding the audit at your business or home. ...
- Have realistic expectations. ...
- Be brief. ...
- Don't offer other years' returns. ...
- Reconstruct records. ...
- Negotiate. ...
- Know your rights.
Taxpayers have the right to appeal their audits. You must file your official protest within 30 days of the date on the letter sent by the IRS. Prepare for your hearing, present your case, and negotiate a settlement with the appeals officer.
Who gets audited by the IRS the most? ›
Who Is Audited More Often? Oddly, people who make less than $25,000 have a higher audit rate. This higher rate is because many of these taxpayers claim the earned income tax credit, and the IRS conducts many audits to ensure that the credit isn't being claimed fraudulently.
What is the odd of being audited? ›
So what are the odds of getting audited? Very low. Only 0.2% of all individual income tax returns filed for the 2020 tax year faced an audit, according to the most recent data available from the IRS. That means about 1 in 500 tax returns are audited each year.
What is a red flag for an IRS audit? ›
Too many deductions taken are the most common self-employed audit red flags. The IRS will examine whether you are running a legitimate business and making a profit or just making a bit of money from your hobby. Be sure to keep receipts and document all expenses as it can make things a bit ore awkward if you don't.
What will trigger an IRS audit? ›
Why would the IRS audit you? 10 IRS audit triggers
- Cryptocurrency a.k.a., Virtual Currency Transactions. ...
- Large Refunds/Net Operating Losses (NOLs) ...
- Mistakes and math errors. ...
- Large changes of income. ...
- Taking a home office deduction. ...
- Filing a Schedule C. ...
- Using round numbers. ...
- Reporting a high volume of cash transactions.
As you'd expect, the higher your income, the more likely you will get attention from the IRS as the IRS typically targets people making $500,000 or more at higher-than-average rates.
How many years back can taxes be audited? ›
Generally, the IRS can include returns filed within the last three years in an audit. If we identify a substantial error, we may add additional years. We usually don't go back more than the last six years. The IRS tries to audit tax returns as soon as possible after they are filed.
It will impose tax penalties if errors are found in your tax returns. There's also the possibility of jail time in serious cases of tax evasion and tax fraud. The IRS may normally flag one return for audit but it does have the authority to audit returns from the past several years.
What happens if you are audited and found guilty? ›
If you fail your tax audit due to a mistake, you may observe an increased tax bill or face financial penalties. If you are found guilty of tax fraud or tax evasion upon being audited, you may face more serious fines or be sentenced to up to five years in jail.
How to beat an audit? ›
The best way to start is by calling the auditor that you don't agree with and make your argument. If you are having trouble making your point then you can choose to meet with their manager, appeal with the IRS, or go to tax court. Consider hiring a tax professional: A tax professional can represent you before the IRS.
Can you get audited after IRS accepts your return? ›
Your tax returns can be audited even after you've been issued a refund. Only a small percentage of U.S. taxpayers' returns are audited each year. The IRS can audit returns for up to three prior tax years and, in some cases, go back even further.
Do I need a lawyer if I get audited by the IRS? ›
If you are faced with a field audit, you should retain the services of a qualified tax attorney. A tax attorney can be present for the audit to communicate directly with the auditor and ensure the scope of the audit isn't accidentally expanded.
Can you get audited for tips? ›
If they suspect that an employer has failed in their tip reporting duties, the response would be a series of warnings followed by an audit. So, if you're wondering whether you can be audited for not reporting tips, the answer is yes.
Can you get audited for not reporting tips? ›
Tips are taxable income, and a failure to properly report your tip income could lead to the following issues: IRS audit of your return. Back taxes owed. Interest and penalties added to your tax debt.
Can you refuse a tax audit? ›
The IRS will proceed to decide the issues against you if you don't respond to a tax audit. You may be liable for additional taxes, penalties, and interest that the IRS will start the collection process on.
What triggers IRS tax audit? ›
Unreported income
The IRS receives copies of your W-2s and 1099s, and their systems automatically compare this data to the amounts you report on your tax return. A discrepancy, such as a 1099 that isn't reported on your return, could trigger further review.
