Tax audits strike fear into the heart of most people. You do not need to be scamming the books to worry about one. Mistakes are always possible.
A tax audit is not that likely
99.4% of individuals and 99.03% of businesses were not audited between tax years 2010 and 2018. During 2019 the Internal Revenue Service (IRS) only carried out 771,095 audits of tax returns.
The 2019 audits brought in an extra $17.3 billion in tax. That works out at an average of $22,436 per audit carried out. Does that mean if the IRS audits you, you can expect that size of the bill? No. It is an average that includes massive corporations. Besides, if your taxes are in order, the IRS should find no reason to charge you extra.
What does the IRS look out for when deciding who to audit?
Here are five common reasons that the IRS may select you for an audit:
- Not filing a tax return: This makes you an obvious target.
- Not declaring income: If another business says they paid you $100,000 and you report they paid you $80,000, the IRS is likely to notice.
- Declaring too many expenses: If you write off too much tax against expenses, the IRS might not believe you. Spending everything you bring in does not sustain a business.
- Claiming home-office deductions: This was once acceptable for employees. Now only independent contractors or the self-employed can do so.
- Earning a lot: The IRS wants to recover as much unpaid tax as possible. If you make $40,000 per year, there is a limit to how much they could find. If your company earns billions, they could recover far more.
While the IIRS is performing fewer audits, it is relying more on computer systems to analyze returns and compare your return to reporting being made the IRS from employers and for 1099’s from Banks and brokerage firms. If someone else reports income paid to you that isnt reported on your return you are likely to get a notice from the Automated Underrporter (AUR) Group. Its a computer generated inquiry to ask about the discrepancy. Sometimes there are good reasons why there is a discrepancy. But if you don’t timely respond, the IRS will assume it is correct and send you a bill.
If you are waiting for an audit and have concerns about your tax returns or need assistance with an AUR notice it is best to seek legal help. Being proactive and correcting a mistake may be better than waiting until the IRS spots it.