20 Jun 19 Audra Walter
Few words inspire as much anxiety as “IRS audit.” We already know the stress that can ensue from just receiving a notice in the mail – so given the time, emotional and financial toll that an audit can take on a person, it’s actually very normal that people should react this way. An IRS tax audit can be a very stressful, difficult thing to experience. An audit can take up a good chunk of a person’s time and, depending on the results, can uncover unpaid tax liabilities and lead to steep penalties. Fortunately, IRS tax audits are quite rare. Statistically, it is highly unlikely that a given taxpayer will be audited by the IRS. No one can be too cautious, however, and so there are things you can do to minimize your chance of an audit.
In this post, we will go over the basics of what an IRS tax audit involves. We will then discuss the probability of an audit by looking at statistics from recent tax years. Then we will conclude by going over a few potential red flags which can increase your chance of an audit. If your return has one of these potential red flags, you should be aware that you’re more likely to be audited.
If you do happen to be audited, it’s very important that you reach out to a professional for assistance. Tax audits are never pretty, and they can end up being a huge burden if you don’t have someone on your side to help you. Hiring a tax professional to act as your representative and consultant throughout the IRS tax audit examination process can make a world of difference. At Boxelder Consulting, we have a team of talented tax professionals who are well-versed in the audit process. If you need their assistance in this area, give us a call at 303-317-6111 and speak to a licensed professional right away. No sales people. No pressure. We believe in second chances. Start your comeback story today.
Overview of IRS Tax Audits
Simply put, an IRS tax audit is the IRS setting your tax return aside and scrutinizing it more closely to see if your taxes were filed correctly. In examining your return, the IRS is trying to determine whether you owe more money than you claimed. If they find out that you actually owe more money, they will attempt to collect the balance and may impose penalties. And, even scarier, if they determine that you owe more because you intentionally filed your return incorrectly, they can assess a staggering civil fraud penalty or even charge you with a crime. Suppose you deliberately make a miscalculation on your return so that your income appears to be much lower than it is. If the IRS can show that this was done purposely, this may lead to a criminal charge as “tax evasion.”
In most cases, however, people simply make a mistake by accident and the IRS tries to collect the remainder. Fortunately, the IRS has a time limit (or “statute of limitations”) on how long they can before they audit your return. Typically, the time limit is 3 years, and so the IRS wouldn’t be able to look back and audit a return of yours if it was filed more than 3 years ago. However, there are exceptions to this time limit. In some cases, the IRS can have 6 years. This longer limit applies in cases where there is a large understatement of income. In the context of IRS audits, “understatement” is interpreted broadly, and so it doesn’t just mean leaving off or omitting income. The IRS has no time limit for a return which was never filed, or if there’s evidence of civil or criminal fraud.
Chances of an Audit
On the whole, the chances of any given tax return being selected for an audit are quite low. An IRS tax audit is a very involved, draining process. The IRS only wants to select those returns which it feels will have a chance of yielding additional income. And this means that the IRS is very careful about which returns it chooses. Let’s look at a few statistics to get a better sense of your chances. For the 2015 tax year, the IRS audited 0.80% of all returns. That is 1 out of every 120 returns. If a taxpayer earned between $25,000 to $50,000 – and this is the majority of individual earners in the U.S. – your chances were even lower, at 0.50%. For those earning between $50,000 to $75,000, the audit rate was 0.47%, and for those between $75,000 to $100,000, it was 0.49%. For the vast majority of taxpayers, the chances of being audited are extremely low.
Potential Red Flags
There are some things which can act as “red flags” to the IRS and potentially increase your likelihood of being audited. Perhaps the most important thing which can increase your chances is income. This is particularly true at the very high end. For instance, if taxpayer earned between $1 million to $5 million, the 2015 audit rate was 8.42%. That is a huge jump up from the numbers we saw for returns at $100,000 or below. For returns between $5 million to $10 million, the audit rate was an even higher 19.44%, and for those with incomes above $10 million the rate was a whopping 34.69%. All things equal, once your income goes up, your likelihood of being audited also goes up.
There are other things which can act as red flags too besides income. If you’re self-employed and take the “home office deduction,” this can be a potential red flag. The reason for this is because the home office deduction has a certain way of being calculated and is subject to limitations. It’s common for people to miscalculate or attempt to claim more than what is allowed. If you make a large donation to take the charitable contribution deduction, this can be another potential red flag. Also, if you make large purchases in a given year, that might cause the IRS to scrutinize your return at tax time. Businesses are required to report transactions involving more than $10,000 in cash. If you spend $10,000 on a car from a dealership, that transaction gets reported, and that may cause the IRS to wonder where your cash reserves came from.
These are just a few common potential red flags, but there are plenty more. In the future we will come back and discuss some of the other red flags you should know about.
Reach Out to Boxelder Consulting for a Strong Audit Defense
The good news is that you’re very unlikely to be slapped with an audit in any given year. This is true even if you have a high income. But, if you do get stuck with a tax audit, it’s critical that you reach out to a tax professional who can represent you through this process. At Boxelder Consulting, we’re deeply familiar with the IRS tax audit procedure and can help you get through this procedure with as few headaches as possible. Make no mistake, the IRS tax audit process can be extremely draining, and this is true even for the simplest cases. You need representation to make sure that the process doesn’t become a grueling ordeal. If you receive a tax audit, give us a call at 303-317-6111 for a consultation. We believe in second chances. Start your comeback story today.