Taxes 2022: How to avoid an IRS audit of your taxes

Being audited by the IRS is a common fear around fiscal time. So how nervous should you be? If you play by the rules and understand what can lead to unwanted scrutiny, not much: the IRS leads half of the audits which he did only a decade ago. As of 2019, the agency was auditing only 0.4% of all taxpayer returns, down from more than 2% in the 1970s.

However, it is important to understand what red flags can cause with the IRS, as well as how to be prepared in case the tax agency audits you. While it is impossible to completely inoculate, as some of the audits are truly random, tax experts say there are steps you can take to minimize the likelihood of receiving this dreaded warning from the IRS.

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“The IRS has to make its own judgments about what resources it will put into auditing people and how much profit they will get,” said Eric Bronnenkant, Betterment’s chief tax officer. This includes “how much money they can raise from taxpayers who are doing something wrong, and how much that instills the proper fear in people against doing harm.”

A couple of major issues may draw the attention of the IRS, Bronnenkant noted. First, while the overall audit rate is low, there is a higher inspection rate for low-income workers who claim the federal tax credit for labor income. Another important red flag is when people don’t report all their income, which can happen if someone forgets that they made money with a side concert, for example.

EITC: Why the tax credit can lead to an audit

Some Americans may have more reason to worry about being audited than others. One such group is low-income households with less than $ 25,000 in annual income.

This group is five times more likely to be audited like everyone else, according to a recent analysis of IRS data by the Transactional Records Access Clearinghouse (TRAC) at Syracuse University. About 13 tax returns out of 1,000 filed by those earning less than $ 25,000 were audited during the fiscal year ended Sept. 30, compared to a rate of 2.6 per 1,000 tax returns for individuals. with revenues in excess of $ 25,000, the group found.

The reason is due to a higher error rate with the EITC, with an analysis that found that up to half of the tax claim statements had erroneously claimed too much or incorrectly claimed the credit, according to the Conservative. Heritage Foundation.

These audits are usually handled by letter, also known as a “correspondence audit.” The IRS will send a letter to clarify an issue, as opposed to more complex face-to-face audits. More than half of the correspondence audits initiated by the IRS last year involved the EITC, TRAC found.

Report all your income

The IRS receives records of your income from employers, banks, investment firms, and other companies. This means that if your tax return income does not match your records, you may be marked for an audit.

If you’re not sure what 100% of your income is, you can check that your information is in line with the IRS by requesting a so-called salary and income transcript. This reveals the information the IRS has about any type of income it has received. You can request it for 10 years.

“You must report revenue from any source from which you derive it, unless there is a specific exemption,” said Martin Davidoff, national managing partner of accounting firm Prager Metis. “The highest volume of problems I see is the non-notification of income reported to the IRS.”

Do not round and avoid high lows

Another red flag for the IRS is when people calculate how much they have spent or received and round the number, rather than reporting the exact amount. Although “a certain amount of rounding is acceptable,” writes Accounting Today, using the exact number is always the best option.

High travel and entertainment expenses on a business return are another such flag. The IRS “knows what the industry average might be,” said Nina Olson, founder of the Taxpayer Rights Center and a former national taxpayer advocate. “And their formulas take into account outliers.”

What to do if you are being audited

If you are audited, it will probably be through a mail audit. The letter will tell you that you have been selected for an IRS audit and will tell you what information you need to send them, according to the Taxpayer Advocacy Service (TAS).

Read the letter and submit the information before the date the IRS requests it. If the agency needs more information, it will contact you again, TAS said. While this may seem simple, correspondence audits “may be a challenge for low-income taxpayers,” according to the group’s most recent annual report to Congress.

“Taxpayers who want to talk to someone about an audit are limited to calling a representative on a toll-free line,” the TAS report notes. “Getting the IRS toll free is difficult and time consuming.”

If you find the letter confusing, TAS recommends making an appointment at your local IRS taxpayer assistance center or seeking help from a professional, such as a tax preparer. Taxpayers with incomes below $ 50,000 can also get help from a Low Income Taxpayers Clinic.

Be prepared to back up your receipts and records, Betterment’s Bronnenkant advised.

“If you don’t have all the receipts and documentation for expenses, let’s say you’re an Uber driver and you haven’t kept everything, then the IRS can deny you deductions that you have to legitimately claim but can’t afford.” . He said.

The IRS usually has a three-year limit on auditing your returns. In cases where you have paid much less for your taxes, the limit goes up to six years. Tax professionals usually recommend that you keep tax records for four years, to stay out of the three-year limit.

– With the report by Irina Ivanova

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• IRS
• Taxes