Be prepared for an IRS audit
The 2018 (fiscal year) audit statistics were recently released by the IRS. It showed that fewer taxpayers had their returns examined compared to prior years. However, this will be of little consolation if you are one of the few that are chosen for an audit. Understanding how and why an audit is conducted may better prepare you.
IRS audit statistics
Only 0.59% of individual tax returns were audited in 2018. This is great news when compared with 0.62% in 2017. 2018 fiscal year had the lowest percentage of audits since 2002.
As before, those with incomes over $1 million face higher odds. In 2018, 2.21% of taxpayers with adjusted gross incomes (AGIs) between $1 million and $5 million were audited, which was down from 3.52% in 2017.
Taxpayers with AGIs of $10 million and more experienced a decline by about half in audits. In 2017, 14.52% of their returns were audited, but that percentage dropped down to 6.66% in 2018.
How to survive an audit
Although there weren’t as many audits this past tax year, the IRS still examines thousands of returns. Even if you’re one of the small number of taxpayers who is chosen to be audited, you will make it to the other side with proper planning.
The best and simplest way to survive an IRS examination is preparation. You should routinely keep proper documentation — invoices, bills, canceled checks, receipts, or other proof — for all items listed on your tax returns.
If your return is selected to undergo an audit, don’t panic right away. An error might not have even been made on your return. Some returns are randomly selected based on statistical formulas that the IRS’ computers use. Their program compares the income and deductions on a return with what other taxpayers report. If a taxpayer deducts a charitable contribution that’s significantly higher than what others with similar incomes report, the IRS may want to look into this further.
Returns can be selected due to the association when they involve issues or transactions with other taxpayers who were previously audited, such as business partners or investors. Oftentimes, the exam won’t begin between one to three years after your return is filed.
Have proper representation. Having a tax professional represent you at an audit is the best way to go. Tax professionals know the issues the IRS is likely to scrutinize and what auditors will most likely have a position on. Having a tax pro represent you means that they can prepare your records and point to the proper authority (such as the courts or other valid guidance), possibly forcing the IRS to close the audit.
1. How in depth is each audit?
An audit’s scope depends on the return’s complexity. If your return reflects business or real estate income and expenses, most likely it will take longer to examine than a salary income.
2. How are audits conducted?
An audit can be carried out through the mail or an in-person interview. An IRS officer will review your records to ensure everything listed on the return is accounted for. The interview may be administered at an IRS office or at the taxpayer’s home, business, or accountant’s office.
3. What will they ask for during an audit?
It’s important to know that in many cases, the IRS asks for proof of the items they are looking into and normally closes the audit when sufficient documentation is given.
4. I’ve received an IRS audit letter, what do I do now?
If the IRS sends you an audit letter, we’re happy to help you. Contact us to discuss your audit situation or to prepare your records to avoid one.
See more helpful information on IRS audits here: https://www.irs.gov/businesses/small-businesses-self-employed/irs-audits