5 Reasons to Stop Worrying About a Tax Audit
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If there’s one thing many of us don’t want to see in our mailbox, it’s a letter from the Internal Revenue Service (IRS).
Even worse, we don’t want to get a letter from the IRS informing us that we are subject to a tax audit.
While you can never guarantee the IRS won’t audit you, understanding a few facts about IRS tax audits may help ease your fears.
1. Your chances of an audit are very low.
If you are in the middle- or lower-income range, and your taxes are relatively straightforward, your chances of being audited by the IRS are pretty low. From 2011 to 2019, the IRS only audited 0.55 percent of individual returns filed.
Instead, the IRS tends to target high-income earners when choosing who to audit. In the same timeframe of 2011 to 2019, the IRS audited 8.9 percent of individual returns for taxpayers with incomes greater than $10 million.
2. A tax audit doesn’t automatically mean you’re in trouble.
While it’s true that the IRS can audit people when they suspect they have done something wrong, that’s often not the case. The IRS audits a portion of the taxpaying public every year. You can be selected purely as a matter of chance.
In other cases, something in a person’s return can put them at a higher risk of an audit. If the information on their tax return doesn’t match up with the data the IRS received from another source, such as Form 1099-MISC or 1099-K.
Additionally, taxpayers who are above-average earners are more likely to be audited. Higher-income taxpayers tend to have more complex returns, and the IRS typically collects more money from them.
3. IRS tax audits generally go back two or three years.
When you file multiple income tax returns over the years, you may wonder what would happen if the IRS audited an old return. Could you find your information? Could you remember any details?
Fortunately, you don’t need to worry about that happening. According to the IRS, most tax audits are regarding returns filed within the last three years. If they find a substantial error, they may add more years. But even then, they seldom go back more than six years.
4. You can reduce your chances of an audit.
Certain items on your tax return may attract the attention of the IRS and make you a more likely target for a tax audit. For example:
- Business losses that are actually hobbies: If you raise horses or dogs, for example, and take a loss every year, the IRS may disallow it because your “business” only classifies as a hobby.
- Deductions and credits for unusual amounts: If you claim you give a large portion of your income to charity through non-cash contributions, the IRS may want a closer look.
- Business deductions: The IRS may take particular interest in unusually large travel or entertainment business expenses.
- Large casualty losses: You can only deduct losses not reimbursed by your insurance company. If you write off a large casualty loss, the IRS may want to look closer at the situation.
Despite those situations, don’t be dissuaded from taking deductions you qualify for just because you’re afraid of a tax audit. Just be aware that the IRS may look into certain items. Keep your records in good shape in case they do.
The IRS is less likely to audit returns that are free from mistakes. By following the interview questions in TaxAct, you can easily prepare a complete and accurate return. And to give you even more peace of mind, TaxAct offers Audit Defense1 to provide audit protection services for your income tax return. During the filing process, you can take advantage of the offering. If the IRS audits you down the road, an experienced audit professional will respond to inquiries from the IRS and state taxing authorities on your behalf.
5. If the IRS audits you, don’t panic.
Some IRS tax audits are different from what you might expect. The IRS may just want additional documentation or a response about a particular item. Reply as quickly as possible and move on.
If the IRS requests an office or field audit, you can gather your information and represent yourself if you are comfortable doing so. You also have the right to choose someone to help. If you file your income tax return using TaxAct, you can take advantage of audit protection services through Protection Plus.
You have certain rights as a taxpayer when subject to an audit. Besides the right to representation, you also have the right to know why the IRS is requesting information, to make an audio recording of an interview with notice, and not be repeatedly examined over the same information.
This article is for informational purposes only and not legal or financial advice.
All TaxAct offers, products and services are subject to applicable terms and conditions.
1See Audit Defense provided by Tax Protection Plus (PDF) for further details of services and requirements. May not apply to certain forms and credits. Certain customers may not qualify for services based on past tax audit history, residency, or other factors. Audit Defense is not insurance. Audit Defense is subject to terms and conditions located on Tax Protection Plus’s website.
TaxAct, Inc. gets fees from some third parties, including Tax Protection Plus, that provide offers to its customers. This compensation may affect what and how we communicate offers to you. TaxAct is not a party to any transactions you may choose to enter into with Tax Protection Plus, does not itself offer legal or financial advice, and disclaims any liability arising out of such transactions. Please see the third parties’ websites for full terms and conditions.”