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IRS Audits: Types, Tips and Warnings

What is an audit?

An audit is an inspection of an individual's or entity's books and records by the IRS. If you're being audited, the IRS will send you a letter stating which type of audit applies to you.

There are 3 types of audits:

  • Correspondence audit
  • Field audit
  • Office audit

Correspondence Audit:

The IRS will request documentation, and you will be able to mail it to them instead of delivering it in yourself.

Field Audit:

Field audits usually involve physical IRS Inspections where a representative will come to your location, These audits generally would have to do with a business.

 Office Audit:

You must visit an IRS agent in their office and provide documentation based on what was requested.

IRS Audit Statistics
Income for Tax Returns Tax Returns Filed Tax Returns Examined Percent Examined
Less Than $25,000 59,211,700 1,076,945 .81%
25 to $50,000 27,263,000 259,794 .58%
50 to $100,000 17,019,200 196,582 .62%
Above 100,000 4,540,800 129,320 1.66%

The IRS says that most people are picked for an audit based on a computer analysis to determine which tax returns are most likely to be in error. Each State has it's own audit criteria.

Percentage wise, the IRS audits very few tax returns. Most tax returns singled out by the IRS for an audit contain:

  • tax deductions that appear to be too high in relationship to the person's income
  • tax items that are erroneous
  • tax items that require proof or an explanation
  • items on the IRS' tax issues hot list.

With today's computer technology there are more ways than ever that the IRS can monitor tax compliance.

You are responsible to keep all supporting tax documentation for 7 years in case of an audit.

According to the IRS annual data book, individual returns where taxpayers claimed the Earned Income Credit were high on the list to be audited, business owners filing a Schedule C are also increasingly being audited.

IRS Audit Tips:

  • Provide everything the IRS asks for within the requested amount of time.
  • Bring along your tax return and all of the supporting documentation for the tax year being audited.
  • Never let the auditor keep any of your original documents, provide them with copies of everything requested.

 

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