It’s a topic no one likes to discuss – an IRS audit. But,
is it worth discussing? What are the chances, as an individual taxpayer, of
getting audited? Here’s some statistics and tips:
What are the odds?
In 2015, about 0.8% of prior year personal tax returns filed were audited. Out
of those, 39% were for returns that claimed the Earned Income Tax Credit
(EITC). The number of returns being audited has been decreasing since 2010.
Examinations of returns claiming the EITC, however, are increasing as a
percentage.
How are returns
selected for audit? All personal returns are run through the Discriminant
Function (DIF) system. DIF uses confidential and undisclosed mathematical
formulas to assign a score to each return. The higher the score, the more
likely the return will be audited. It does not, however, guarantee an audit.
The score merely indicates the potential. Returns with high scores are then
manually reviewed. Screeners look at the return as a whole and evaluate the
significance of each item. At that point, it’s determined whether the return
warrants an audit or not.
Sometimes, returns are selected for specific reasons. For
example, if the W-2 wages you report don’t match the amount your employer
submitted to the IRS, it will trigger an inquiry. For more information on other
methods of selection, go to https://www.irs.gov/uac/the-examination-audit-process.
The good news.
About 78% of audits are correspondence audits, meaning you’re not going to have
an agent knocking on your door. Documentation and other evidence to complete
the examination is requested via letter. In return, you mail back copies of
whatever they’re requesting. Telephone calls might be involved as well,
depending on the situation.
For more complex issues that can’t be feasibly resolved
by correspondence, an in-person interview at the nearest IRS field office may
be scheduled.
The first step.
If a personal return is selected for examination, the IRS will send an initial
contact letter. They will not call or e-mail you. The letter will either 1)
request information or 2) indicate a correction on the return and ask for your
written agreement to the change. Corrections can be challenged, though, if you
don’t agree.
What you can do. If
you receive a letter from the IRS, the best thing to do is open and read it
immediately. This will give you enough time to respond. Time limits are usually
imposed so the sooner you read it, the more time you have to prepare and send
your response by the deadline.
Read the letter carefully from beginning to end. Since
most audits are of the correspondence type, odds are that the letter is
requesting copies of certain documents be submitted via mail or fax. Make
copies of the documents requested, write your Social Security number on each
document, and include a copy of the letter with your response. If you plan on
faxing, consult the letter to obtain the fax number and what information to
include on the fax cover sheet.
If you’re stuck.
If you’re still unclear on what to do after reading the letter, contact your
tax professional or accountant immediately. It’s important that a response is
given by the stated deadline on the letter so the issue doesn’t escalate.
Final thoughts.
The odds of getting audited are low. If your tax return gets selected, however,
open IRS letters immediately, read them carefully, and be timely and thorough
when furnishing the requested information. It will facilitate a smoother
process and it will be a lot less stressful on you. And when in doubt, always contact your accountant.
