This post is part of the textbook personal finance series which covers basic personal finance skills by going through an actual textbook, chapter-by-chapter. Check out the intro post for more information.
In the last few weeks, the textbook has been going through filing income taxes, a very timely subject. We’ve gone through all the information about filing taxes, but assuming that you have now filed the taxes the next big question is “Will I get audited?” and “What happens if I get audited?”
Flexo of Consumerism Commentary wrote about how to get audited. It’s an excellent tongue-in-cheek article about the most common reasons to get audited.
What is a Tax Audit?
Many people mess up their taxes just a little without getting an audit For some, it just means receiving a bill from the IRS for taxes owed or even a refund if you overestimated what you should’ve paid. An audit is a review of your taxes done by the IRS. Most audits are just a request for further information.
When claiming anything on your tax return, make sure you have any necessary documentation and/or have access to it. An audit doesn’t have to be bad. If you claimed something that they didn’t want to take your word on, you prove the claim is valid, then that’s the end of it. And if you were mistaken…it’s not fun to owe taxes, but it’s rarely the end of the world. The IRS works out payment plans for those who can’t pay right away.
Who Gets Audited?
At the time the book was written, mid 00s, about 0.6% of tax filers got audited each year. I don’t believe the number has changed much since then. If you didn’t claim large or unusual deductions, didn’t earn more than $250,000 for a couple, and/or didn’t file a Schedule C, your chances are pretty low.
E-filing actually doesn’t increase your likelihood of an audit, since most tax programs are programmed to catch errors.
What Types of Audits Are There?
The simplest and most common type of audit is a “correspondence audit.” This is just a piece of mail asking you to write back with a clarification or send in some documentation. An “office audit” is a little more serious but just requires you to bring clarification to an IRS audit.
The worst kind of audit is a “field audit.” This is when the IRS comes to you (your home, business, or your accountant). They may just be verifying that you have the home office you’re claiming. Or they may be there to go over your financial records in detail.
Do You Have Audit Rights?
Yes. You have the right to request time to prepare. You can also ask for clarification of the items being questioned. Suggestions from the book:
- Decide whether to bring your tax preparer, accountant, or lawyer (if relevant).
- Be on time for your appointment; bring only documents relevant to the issues the IRS is looking into.
- Present your tax evidence in a logical, calm, and confident manner; maintain a positive attitude.
- Make sure the information you present is consistent with tax law. [I don’t like the book’s phrasing here—what it’s trying to say is “check your work.” Be prepared to backup your claim. If the deduction/credit doesn’t actually apply to you, admit it.]
- Keep your answers aimed at the auditor’s questions, don’t ramble. The five best responses aare “Yes,” “No,” “I don’t recall,” “I’ll have to check on that,” and “What specific items do you want to see?”
If you disagree with the results of an audit, you can ask for a conference at the Regional Appeals Office. If you still disagree, you can go to the U.S. tax court, claims court, or district court. But unless you’ve got a lot of money on the line, it’s probably not worth it.
When doing your taxes, check your deductions and such before submitting them. And when audited, keep your cool. And if you know you messed up your taxes, check out my article about filing an amended return.