From movie portrayals of IRS auditors as fear-mongering bullies to dozens of unnerving myths and urban legends, it’s fair to say that there is no shortage of negative perceptions about tax auditing. When it comes down to separating fact from fiction, tax filers want to know: Is the process really as bad as it seems in pop culture? In a word—No! In this month’s blog we’ll explain the auditing process and dispel some common misconceptions about tax auditing.
What is tax auditing?
You can think of tax auditing as a fact-checking process by the Internal Revenue Service (IRS) on someone’s personal or organizational taxes. An audit occurs when the IRS, which is overseen by the U.S. government, selects and investigates a tax return to ensure that all reported information is correct. Most often, the IRS is simply seeking clarification through something called a correspondence audit. This type of audit occurs when a return doesn’t match typical trends based on the IRS’ data. In this case, the IRS requests documentation from the filer, and the audit can be resolved quickly if everything checks out. An examination audit can be a little bit more involved and occurs when something looks truly irregular in a return.
How likely is it that I will be audited?
While many people live in fear of being audited, if you submit your taxes regularly and honestly, your chances are actually quite slim. According to TIME, the IRS typically audits less than 1% of all tax returns. Your odds of being audited increase substantially if you don’t report any income at all or report an income of $1 million or more. According to the IRS, 16.22% of individuals reporting $10 million will be audited. Your odds also increase if you’re submitting your taxes internationally, or if you submit an estate tax return worth more than $5 million.
Even so…What if I am audited?
If you find out you are being audited, there’s no reason to panic. Keep in mind that sometimes the IRS might actually owe you more money at the end of the audit (depending on what they find). If you’ve filed your taxes honestly and correctly, you have nothing to fear, and cooperating with the IRS will make your audit experience much easier! You might be able to resolve your audit remotely, or you may be asked to meet with an IRS auditor locally. Either way, make sure to document all information you receive from or give to the IRS for your records.
The bottom line
The easiest way to attain peace of mind about tax auditing is to ensure that your tax return is submitted correctly, and that it honestly reflects your financial situation. Even a simple mathematical error or other human mistake can lead your return to be flagged for audit. Whether you’re submitting personal, nonprofit, or organizational taxes, it pays (truly) to submit your return right the first time.