Many people view the IRS as this big powerful monster that can garnish your wages and seize your assets. The reality is that IRS audits rarely happen. Out of over 161 million tax returns that were filed last year, less than 1% were audited. The best way to stay out of trouble is to learn the red flags that can trigger an IRS audit.
What Is an IRS Audit?
An IRS audit is essentially a review of your tax return to ensure that the information you provided is accurate and complies with tax laws. The IRS conducts these audits to verify that you have paid the correct amount of tax.
There are three main types of IRS audits: correspondence audits, office audits, and field audits. A correspondence audit is the most common and involves the IRS requesting additional information or documentation via mail to support the items reported on your tax return. An office audit, on the other hand, requires you to visit an IRS office with specific documentation to back up your tax return. Lastly, a field audit is the most comprehensive, where an IRS agent visits your home or place of business to conduct a thorough examination of your tax return.
Understanding your rights and responsibilities during an IRS audit is crucial. You have the right to representation, meaning you can bring an accountant or lawyer to assist you during the audit. Additionally, if you disagree with the findings, you have the right to appeal the decision. Knowing these aspects can help you navigate the audit process more smoothly and ensure that you are treated fairly.
What Triggers an IRS Audit?
1. Earning A Lot of Money
Outside of people who report no adjusted gross income (AGI), nobody gets more attention from the IRS than high earners. In fact, the more money you make, the greater your chances of being audited.
According to the 2023 IRS Data Book, individuals with an AGI between $1 and $25,000 were audited at a rate of 0.4 percent. The rate increases to 1.4 percent for those with an AGI between $5 million and $10 million, making them more susceptible to various types of tax audits. If you manage to rake in over $10 million the odds jump to 2.9 percent.
2. Failing to Report All Your Income
When you receive copies of your W-2s, 1099s and other tax documents, the IRS does as well. So, don’t try to be slick and omit information when you do your taxes. If what’s reported on your return doesn’t match IRS records, you better believe you’ll be hearing from them. If you receive forms from your employer or client reporting the wrong income, contact the issuer to file a correction with the IRS. If discrepancies are found, you may be required to sign an examination report to finalize the audit outcome.
3. Making Math and Clerical Errors Can Lead to a Correspondence Audit
You’re sadly mistaken if you think math and clerical errors are no big deal. In 2023, the IRS identified over 2 million math errors on tax returns. As a result, millions of taxpayers had to be notified. If you know math isn’t your strong suit, use ezTaxReturn to prepare your tax return. There’s no need to crunch the numbers because the math for you!
If the IRS makes a math error adjustment, it will issue you a notice of the correction and the balance due. If you disagree with the IRS’s adjustments, you can request a conference with an IRS manager to review your case. You can accept the changes and pay the adjusted amount or request abatement within 60 days of receiving the notice. If you’re unable to pay the full amount, you can work with the IRS to set up a payment plan so you avoid any late penalties.
4. Claiming the Earned Income Tax Credit
The EITC was designed to help hardworking Americans who earn low-to-moderate incomes. But it is one of the most common places that people make errors. Be sure to double and triple-check your entries when claiming the credit because it’s known for tripping people up. Ensure that all information about your family members is accurate to avoid errors when claiming the credit.
Returns claiming the credit also have a higher chance of triggering an IRS audit due to the high rate of false claims. Get it right the first time—ezTaxReturn guarantees 100% accuracy and you’re biggest possible refund.
5. Taking the Home Office Deduction May Trigger an IRS Audit
If you are self-employed and work from home, you may be able to deduct your home office space on your tax return. But the deduction has earned a reputation for triggering IRS audits because many people misunderstand and misuse it.
There’s nothing wrong with claiming the home office deduction if you truly qualify, but make sure you’re clear on the rules. The office room must be regularly and exclusively used for your business. It must also be your business’s primary location. If the space is sometimes used as your guest room or playroom for your children, then you cannot claim it on your return. Clearly defining your personal space and business space is crucial to qualify for the home office deduction.
Make sure you keep clear and accurate records of your business and office expenses in case you need to prove your eligibility to the IRS. To reduce the risk of additional math errors, you can use the simplified option for home deduction to calculate your write-off. This allows you to deduct $5 for every square foot of your designated office space—up to 300 square feet—for a maximum deduction of $1,500.
6. Receiving an Early Distribution From Your IRA
When you don’t have any savings, sometimes you have no choice but to tap into your IRA when emergencies pop up. If you’re younger than 59 ½, you’ll pay a 10% early withdrawal penalty unless you qualify for an exception.
For instance, you can avoid the penalty if the money is used to pay for college or if you took up to $10,000 to buy your first home. The IRS has a whole list of exceptions for you to choose from. Just make sure it’s legit otherwise, you may find yourself sitting in an IRS audit. Managing your finances carefully can help maintain your own sanity and avoid unnecessary stress.
Your Rights and Responsibilities
When facing an IRS audit, it’s essential to be aware of your rights and responsibilities to ensure a fair process. Here’s what you need to know:
Your Rights:
- Right to Professional Conduct: The IRS must treat you fairly, professionally, and with respect.
- Right to Privacy: Your personal and financial information is protected by law, and the IRS cannot disclose it without your consent, except under certain conditions.
- Right to Representation: You can have someone (like a tax professional or attorney) represent you during the audit.
- Right to Appeal: If you disagree with the audit findings, you have the right to appeal within the IRS and, ultimately, in court.
- Right to be Informed: You have the right to know why the IRS is auditing you and to be given clear instructions on what to provide.
Your Responsibilities:
- Cooperate with the Audit: Respond to IRS requests for documents and information. Provide the requested documents in a timely manner.
- Maintain Accurate Records: Keep detailed and organized records of your income, expenses, and other relevant financial documents.
- Be Honest: Provide truthful and accurate information to the IRS. False statements or omissions can lead to penalties or criminal charges.
- Understand the Process: Familiarize yourself with the audit process and know your options. You have the responsibility to understand the issue at hand and seek professional help if needed.
- Pay Taxes Owed: If the audit results in additional tax owed, you must pay it, or set up an installment plan with the IRS.
Minimize Your Audit Risk by Filing With ezTaxReturn
Filing electronically through a trusted tax prep solution like ezTaxReturn is faster, safer, and more accurate than filing taxes on your own. Plus, ezTaxReturn offers free tax filing for simple returns.
Still nervous about an IRS audit? Protect yourself even further with ezTaxReturn’s Audit Defense Protection. If you are audited or receive an IRS notice, ezTaxReturn will help you each step of the way, including
- Reviewing your submitted return and documentation
- Flagging any audit-related issues or concerns
- Advising you on responding to the IRS (or handling it for you, if requested)
- Organizing and attending audit appointments
- Coordinating with an IRS manager to resolve audit disputes
File with confidence and avoid IRS audits—ezTaxReturn guarantees 100% accuracy for your tax returns!
The articles and content published on this blog are provided for informational purposes only. The information presented is not intended to be, and should not be taken as, legal, financial, or professional advice. Readers are advised to seek appropriate professional guidance and conduct their own due diligence before making any decisions based on the information provided.
