How IRS Audits Actually Work

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There are many misconceptions about what it means to be audited by the IRS, or why it might even be happening to you in the first place. No, the IRS isn’t just under the impression that there’s money hidden in your mattress that you’re waiting to be wired to a secretive Swiss bank account.

In actuality, 75% of IRS audits are simple correspondence audits in which the IRS sends a letter asking about a few issues on your tax return. We don’t blame you for being paranoid, as movies and media would have you believe the IRS wants to seize everything you own like some kind of tax boogeyman.

Find out how IRS audits actually work so you can prevent issues and avoid penalties when filing your next return.

So, What is an Audit?

The term “IRS audit” may strike fear into the heart of most individuals, but it’s really just a check-up on your finances. Simply put, an IRS audit is a review of an organization or individual’s financial records performed to ensure all information is correct.

An IRS audit aims to make sure financial information is reported correctly according to the current tax laws. Typically, the IRS wants to verify the amount of income and deductible expenses you’ve reported is accurate.

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IRS Audit Triggers

Anticipating an audit is difficult because an organization or individual can be selected even if a problem is not believed to exist. In fact, the IRS uses a random selection process that chooses individuals based entirely on a mathematical formula. Additionally, the IRS uses computer screening to compare your audit against “norms” determined from a random sample of similar returns. You may also be selected for an audit if your return involves issues with another taxpayer or party who’s been chosen for an audit.

Tax return red flags that can trigger an IRS include:

  • Math errors
  • Failure to report income
  • Claiming excessive donations
  • Reporting too many losses
  • Inaccurate deductions
  • Incorrect estimations

What Does It Mean to be Audited?

Being selected for an IRS audit does not mean agents will storm your home and raid your office.

The IRS will notify you by mail and will manage the rest of your audit through mail or an in-person interview if necessary. The location of the interview will vary by circumstance, but it will likely happen at an IRS office or at the taxpayer’s home, place of business, or accountant’s office. 

During this process, the IRS may request additional financial information about items on the tax return you submitted. In-person audits are typically reserved for circumstances where there are too many records to mail.

Comply with the IRS as needed, or legally dispute an issue if you believe a mistake has been made and have sufficient proof to support your claim. If you end up owing money to the IRS—pay the fine and explain the cause of the issue to display you did not have criminal intent when reporting.

To learn more about the audit process you may undergo, take a look at the Audit Techniques Guides provided by the IRS to assist with the auditing process across industries.

Common Questions About IRS Audits

What happens if I don’t file my taxes?

It’s better to file your taxes late than not at all. The IRS will start by sending a letter warning you of a potential failure-to-file penalty of 5% per month as long as your taxes remain unpaid, up to a maximum amount of 25% of your unpaid tax bill. The IRS may then attempt to create a return for you using records available from your employer, but they won’t include any deductions or other available benefits. If the IRS still doesn’t hear from you—things can escalate to the point where they’ll seize money from your bank, put a lien against your property, and garnish your wages to pay off fines.

How far does the IRS go back during an audit?

Most of the time, the IRS will only look through two years of returns when performing an audit. Additional time may be added if a substantial error is identified, but the IRS rarely goes back more than six years. Outside of prior returns, the IRS may request other records such as receipts, bills, and legal papers.

How long will an audit take?

The length of each audit will vary by circumstance. Simple correspondence audits through the mail may be resolved within three to six months, while field audits requiring interviews and information collection can take over a year. In rare cases, audits can take up to three years for complex issues.

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Prepare Your Business for Tax Time

Reduce the risk and get the tools you need.

How to Prevent an Audit and IRS Penalties

The truth is there’s no surefire way to prevent being audited, but you can minimize your chances by using accounting software to ensure your finances are always up to date and accurate. ScaleFactor can help you track transactions and organize records so you can easily file on your own, or let our experts handle your taxes and take the stress out of filing. 

Learn how ScaleFactor’s Compliance Software can help your business avoid IRS penalties and keep up with the latest tax laws and upcoming deadlines. Find out more and schedule a demo today!

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