Related article: Dealing with an IRS Audit – 10 Expert Tips
Generally those who are audited fall into some common categories:
- Being wealthy – 12.5% of those who make over one million dollars a year are audited. The IRS is diligent in checking that these individuals are reporting their income correctly.
- Making mistakes – These mistakes are generally failure to report all income, mismatched or transposed numbers from the employer’s W2, or incorrect calculations like rounding errors.
- Self-Employed – The IRS checks the deductions of a self-employed individual and compares them to others who work in the same industry. Records concerning home offices should be kept in case.
- Making large donations to charities – The IRS compares the amount of income and donations to see if they are mutually agreeable.
- Business partners and family members being audited.
There are three types of audits that the IRS conducts.
A correspondence audit is more common and done entirely by mail. They will have a form that an individual will fill out. It will ask common questions about income, expenses, and itemized deductions.
A field audit is when an IRS agent visits an individual at the home or business. This audit typically requires in depth record keeping as the IRS will want to inspect them and make sure they match the numbers reported.
An office audit is when the IRS requests a person to take records and paperwork to the closest office. This is done as a formal way to inspect records and paperwork without needing to send a field agent to your home or business.
If a person is being audited, it is imperative to respond to the IRS letters by the deadline given on the notices. The IRS may consider an extension during this time, but they are far less likely to be so considerate once the time period has passed.
It’s also important for a person being audited to have copies of documents and records at the ready. Having copies means that the originals aren’t lost or destroyed during the audit process. We also recommended, if you’re being audited, to be represented by a tax attorney or CPA for protection.
Receiving an audit letter or phone call is stressful, but understanding how the process works can help make it a smoother transition back to normal.