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Just like a cross-country move or a root canal, the thought of getting your tax return audited is one that makes people worry. “Almost all of us have an extreme phobia regarding IRS audits,” said Paul Miller, a CPA in Manhattan, New York. “The only people who aren’t scared are those who have previously been audited and it went well.”
Usually, the IRS can audit returns going back the last three years, but in some situations, it can go back even further. You could be required to provide copies of documents to verify credits, income, claimed deductions, including bills, receipts, and canceled checks.
Here are five interesting facts about IRS audits:
The less money you earn, the smaller your odds for an audit. For example, people who make less then $200,000 a year have only a 1% chance of being audited. Part of the reason is due to the budget cuts of IRS over the last couple of years. Your odds jump to 4% if you make over that $200,000. Even if you earn over $1 million, your odds will be around 12%.
Many people assume that any deduction is one of the IRS audit triggers. In all the years of practice, Paul Miller has never seen an audit being triggered due to someone making a home office deduction. It’s completely okay for people to claim legitimate expenses.
When the IRS goes over your numbers, one of the biggest things they pay attention to is how do they compare to others in a similar financial situation. For example, if your style of living is similar to that of your peers. The IRS website posts statistical averages for itemized deductions, income, and exemptions.
So one of the triggers the IRS has for an audit is when someone files a report that is significantly outside the normal reporting range. Then’s when their computers may red flag your return for a potential audit. However, you aren’t at the mercy of computers. Whenever a computer flags a return, IRS staff will examine it more closely to see if there is a reason for your numbers being outside the peer comparisons.
The IRS does conduct some random audits to collect data for profiles of average earners in different brackets. These comparison audits done by a computer help the IRS decide who to audit in the future. Some of the factors they look at are vehicle purchases, charitable donations, and deductions. Significant under-reporting or high deductions is what commonly flags a return for a possible audit.
Maybe you’ve always pictured an audit as visiting the IRS with your bag of receipts. The truth is, the IRS has three different types of audits: by mail, in a field audit at your home, or in one of its offices. The IRS never calls people to initiate the audit process.
Mail audits are the most common type and may never go further than correspondence. Usually, you will receive a letter requesting more specific information regarding a deduction or income. If your answer satisfies the IRS and it’s often the end of it.