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Tax audits by the Internal Revenue Service scrutinize your tax return to verify information such as income and deductions, and they are never fun.
Nobody enjoys having their personal tax and financial information put under a spotlight, and while the risk for an audit is typically low, it could always happen to you. (If you are selected for audit, you will be notified by mail; the IRS never initiates an audit by phone.) Here are some tax rules to live by if you want to avoid an audit.
When information on a tax filer’s return doesn’t match up with the information provided by an employer on their W-2 or 1099, this could trigger an audit. The IRS is skilled at matching the income on your return, so if something’s amiss, they’re going to know. If you’ve received a 1099 showing incorrect income, don’t hesitate to ask the issuer to file a corrected form with the IRS.
When filing your paperwork, you’ll want to be sure to report all your income, deductions, exemptions, credits and expenses accurately. The IRS uses computer programs that give each tax return a generated score based on a variety of factors including unreported income, and the highest scoring returns may be selected for an audit.
Whether it is a doctor’s bill or a business dinner, it’s a good idea to keep records of every expense that you claim on a tax return, especially if you’re self-employed. This won’t reduce your odds of being chosen for audit, but it will give you a little less to sweat about if you file a Schedule C.
The IRS usually doesn’t go back farther than 3 years into your taxes, unless they find big issues with them. According to the IRS website, they generally don’t look any farther than 6 years.
Simply put, it’s a detailed review of all of your finances to confirm that you included all income in your tax filing.
The IRS will notify you by mail or by mail and telephone if you are going to be audited. The IRS never reaches out to taxpayers via email or any other method, so know that if you receive an email it is not really the IRS.
The average American taxpayer will never be audited. In fact, the IRS audited just 0.8% of all individual income tax returns filed in 2014 and 1.3% of corporate returns.
It means you’re going to have to cooperate with the IRS agents and provide whatever financial documents they may request.
The IRS can legally audit your returns for up to six years after filing.
Taxpayers can request an extension of up to six months to file their tax returns.
The IRS has up to 10 years to attempt to collect a tax debt, however, there are several circumstances in which this time frame can be suspended, so it could be somewhat longer.
Taxpayers who make $200,000 or more — and especially those earning $1 million or more — may be more likely to have their tax records audited, as are lower-earning tax filers applying for the Earned Income Tax Credit. Those who are self-employed or run small businesses with a heavy amount of cash customers such as bars, restaurants and hair salons are also more likely to be audited, as they may report a substantial net loss.
The IRS’ website lists other reasons for audits. “Sometimes returns are based solely on a statistical formula,” while other returns may be selected “when they involve issues or transactions with other taxpayers, such as business partners or investors whose returns were selected for audit,” the bureau’s site says. If any of these tax situations apply to you, you’ll want to file your tax return with extra care.
Here are some other moves that could put you at risk for an audit:
The IRS may scrutinize tax returns within the past three years for an audit, and if a substantial error is found, the IRS may review your tax and financial records within the past six years. In its written request for an audit, the IRS will list what records it wants to see.
The IRS audits most returns as soon as possible after they are filed. Most tax returns that the IRS selects for an audit will be from returns within the past two years. Some audits are conducted by mail or by in-person interview. The interview may be held at an IRS office (office audit) or at your home, place of business or accountant’s office (field audit). Keep in mind you will be contacted by mail, never by telephone, and that the IRS will provide all the contact information and instructions you need in a letter.
The length of an audit will depend on its type and complexity, the IRS says, but there is a statute of limitations. In general, the IRS has three years to examine tax returns and make assessments, and this three-year period begins after a tax return is due or filed, whichever is later. If the IRS identifies a substantial error, they may request additional years. You can extend the review period yourself by drafting a written agreement with the IRS.
This article has been updated. It was originally published March 13, 2015.
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