A tax audit occurs when the Internal Revenue Service (IRS) wants to verify the accuracy of your income and deductions. Oftentimes, the mere thought of a tax audit is enough to make a person's heart race. Yet those who understand the ins and outs of tax audits can prepare accordingly.
Now, let's take a look at five key questions about tax audits.
1. Are you likely to be audited by the IRS?
Recent data indicates those who report no annual gross income (AGI) have about a 5% chance of being audited. Comparatively, taxpayers who earn an AGI of $10 million or more face about a 16% of a tax audit. And for those who earn between $1 and 199,999 annually, the odds of being audited are less than 1%.
2. How will you find out if you're being audited?
The IRS sends a notice via mail to inform a taxpayer if he or she is being audited. If you receive this notice, you'll have about 30 days to respond. And if you fail to respond, you could face an immediate investigation and penalties.
3. What types of documents will you need to provide to the IRS during a tax audit?
The answer to this question varies. The IRS will inform a taxpayer about any information it requires, and you should provide the IRS only with the information it requests. Because if you go above and beyond the call of duty to provide additional information, the IRS could broaden the scope of its tax audit.
4. How long will a tax audit last?
Generally, a tax audit will take at least one full day to complete. It is important to note, however, that the total amount of time required for a tax audit depends on the complexity of the audit and the organization of your financial records. Thus, if you strive to comply with all IRS requests and provide the IRS with immediate access to any required information, you may be able to speed up your tax audit.
5. Is there anything that you can do to stop a tax audit?
There is no solution to prevent a tax audit. Fortunately, there are several things that you can do to reduce your risk of being audited. These include:
- Double-check your tax return. When it comes to filing your tax return, it is always better to err on the side of caution. Therefore, you should double-check any information you add to your tax return to ensure it is accurate.
- Use realistic deductions. The last thing a taxpayer wants to do is raise red flags with the IRS. If you decide to include deductions on your tax return, use common sense. And if you're unsure whether an expense qualifies as a deduction, consult with a tax professional to find out.
- File your tax return online. Online tax filing programs frequently help taxpayers avoid errors. As a result, filing your taxes online may enable you to minimize the risk of a tax audit.
Ultimately, there is no telling when you may be audited. But if you keep accurate tax records and follow the IRS's instructions, you'll be able to handle a tax audit with ease.