What exactly is a tax audit, and how do you avoid one?
Our tax team takes a closer look at what tax audits are, things that can put your return at higher risk for audit and ways to stay off the IRS radar this tax season.
What is a tax audit?
An IRS tax audit is a close-up examination of your tax return performed to verify income and deduction info, identify inaccuracies and root out instances of fraud. In most cases, the IRS singles out your return for audit when something is suspicious or out of the ordinary, such as when an error, issue or unreported income has caught the attention of those reviewing your taxes.
Essentially, tax audits are conducted to reduce or minimize the gap between what you owe the IRS and what it has received. While audits may sometimes be inconvenient or time-consuming, the audit process provides the IRS an important tool for identifying discrepancies and enforcing compliance with current tax taw.
What are the different types of tax audits?
Tax audits tend to fall within one of four distinct categories:
Considered the least serious type of audit, a mail or correspondence audit usually involves a follow-up request from the IRS for more information to confirm the details of your return.
Office audits are in-person interviews conducted at your local IRS branch office. Performed by audit officers, these audits tend to be more extensive than mail audits and typically require more specific information (receipts, bank statements, etc.) to verify return accuracy.
The most serious type of tax audit is the field audit, which usually takes place at your home or business. Field audits are typically the broadest and most thorough of all audits and often look at most or all items on your tax return.
While relatively rare, the IRS can select returns for audit for no particular reason. Tax returns chosen randomly usually receive a thorough review to ensure everything is correct.
How long does an audit take?
According to the IRS, the length of a tax audit depends on a number of factors, including the type of audit you’re undergoing, how complicated the issues are, the difficulty of locating critical records and how much you agree or disagree with the auditor’s findings.
While tax audits generally take anywhere from several months to a year to complete, there are several items that tend to extend audits the most.
- Adjustments. The more adjustments the auditor makes to your return, the longer it usually takes to wrap things up.
- Small business returns. Business tax returns are often much more complex than individual returns, extending the time it takes to perform a thorough review.
- Penalties. When the IRS pursues financial or criminal penalties for discrepancies in your return, the process can slow down significantly.
- Disagreements. Disagreeing with the auditor’s decisions and appealing your case can sometimes add months or years to your IRS tax audit.
What are common tax audit flags?
There are many reasons the IRS may select your return for closer review.
Here are some of the biggest tax audit flags that can put your return in the IRS spotlight:
Your math doesn’t add up
Missing a zero here or writing the wrong number there can potentially get your return flagged for audit, forcing a closer examination of your federal taxes and causing a delay in processing.
Claiming higher-than-average deductions
If the tax credits or deductions you’ve claimed on your return are unusually large – particularly for your income level – IRS auditors may want to take a second look.
Failing to report income
Whether it was a few extra dollars from a freelance writing gig or a hefty sum made from selling a business, failing to report all sources of income may land your return in the IRS hot seat.
Taking too many charitable deductions
Charitable donations make for well-deserved tax deductions, but claiming too many can sometimes become a major tax audit flag that draws unwanted attention.
Deducting too many expenses
While running a business can offer multiple opportunities to lower your federal tax burden, going overboard or claiming too many expenses in the gray area of what’s eligible may put you at a higher risk for audit.
Of course, the IRS can still choose returns at random, meaning they don’t always need a reason to flag your return for a tax audit. Still, it doesn’t hurt to know why some returns may be selected and what can commonly trigger a more in-depth review.
How to avoid an IRS tax audit
With some of the most common tax audit red flags identified, here’s a look at a few ways you can reduce the chance of an audit this tax season:
Double-check your numbers. It may seem a little obvious, but double- and triple-checking your numbers before you file is key to avoiding preventable mistakes that can put you on the IRS radar.
Always be honest. Omitting information or flat-out lying on your return is not only audit-worthy, but can also land you in serious trouble down the road. With taxes, it’s crucial to always be as accurate and honest as possible.
Use trusted e-filing software. Using the right tax filing software to file your return ensures your math is on the up-and-up and you’re taking advantage of only those credits and deductions you qualify for.
Talk to a pro. A seasoned local tax professional can provide the guidance you need to navigate the tax code and steer clear of issues that often trigger an income tax audit. Not only that, but a tax prep pro could be the resource needed to identify overlooked deductions that can help maximize your federal refund.
The Next Step
Looking to steer clear of an audit this year, but not sure where to start?
Liberty Tax® offers the expert tax prep services you need to ensure your return is accurate, complete and ready for the 2020 deadline. Our tax pros provide the help and support you need to identify deductions, lower your tax burden and get the refund you deserve.