As April 15th approaches, nervous taxpayers may find themselves wondering, “what is the IRS’s audit policy?” Although the thought of being audited tends to evoke panic, the chances of you being audited are actually quite low. Although there’s no guarantee that you won’t ever be audited, the IRS only audits a small percentage of individuals and businesses each year, making it a highly unlikely event. By accurately filling out your federal tax return, keeping careful records, and reporting all income, you can lessen your chances of receiving an audit, as well as the possibility that the IRS will discover a discrepancy during an audit.
According to the IRS, taxpayers who are selected for audits shouldn’t assume that they’re suspected of dishonesty, and not all audits result in a taxpayer owing additional money. There are several methods the IRS uses to select taxpayers for an audit. One way taxpayers are selected is using a computer system that scores each return. Returns receive high scores if the information provided is significantly different from the norm, leading the IRS to believe an audit might result in a sizeable change in taxable income. The IRS also looks for discrepancies, such as W-2 or 1099 forms issued by an employer or financial institution that don’t match the information provided by a taxpayer on his or her return. Another method used by the IRS to select individuals or business for an audit is based on information provided by third parties. Sources might include newspaper articles, friends, or audits of a place for which you worked in the past. If your return is flagged for one of these reasons, an IRS auditor examines your return, and then decides whether to accept it, or forward it to another department to conduct the audit.
In the rare instance that the IRS audits you, it’s important to understand the process. An audit, also called an examination by the IRS, is simply an in-depth check to determine whether or not you reported accurate information on your return, and paid the correct amount of tax. Prior to an audit, the IRS will notify you by mail or over the phone that you have been selected. If the IRS calls you, they will follow up with a letter. E-mail is never used, thus if you receive an email stating you are going to be audited, it’s not actually from the IRS. Additionally, the IRS will let you know if the audit is going to take place by mail, or in person at an IRS office, or at your home or business. The IRS will also let you know which records to have available for the audit. You can request to have an in-person audit rather than an audit by mail, if you have a substantial number of records that would be difficult to mail. During the audit, it’s important to remain courteous and professional, even though you’ll likely be upset. After the audit, an auditor will come to one of three determinations: your return is accurate, you owe the IRS money, or the IRS owes you money. Once the determination is made, you can accept in writing, or appeal the decision.