The IRS recently released its 2018 Data Book, including information on its audit activities for the last fiscal year. This details what you need to know regarding your audit risk, how to prepare for and what to expect in an IRS audit.
Know the Facts
- An IRS audit is a review to ensure your tax filings are reported correctly according to tax laws.
- Both individual and business tax returns can be audited.
- The IRS won’t initiate an audit by telephone.
IRS Audit Statistics
|Totals||FY 2015||FY 2016||FY 2017||FY 2018|
|Tax returns filed in prior calendar year||191,857,005||192,936,878||195,614,161||195,750,099|
|% of Returns Audited||Less than 1%|
What are your Chances of Being Audited?
It depends. But for most taxpayers, LOW. Approximately 1 in 198 tax returns were audited in 2018. The IRS audited 0.6% of all individual income tax returns filed in 2018, and 0.91% of corporation tax returns (excluding S corporations)
There are Two Types of Audits
- Field audit: An in-person interview and review of records. It often happens at taxpayer’s home, business or accountant’s office.
- Correspondence audit: A written request for more info about a specific tax return item or issue handled via mail.
Did you know? Approximately 2/3 of audits are handled through the mail.
Reasons you May be Audited
Although the IRS uses random selection as one method to choose tax returns to audit, it may also flag returns because:
- You’re in a higher income tax bracket.
- You have math errors on your tax return.
- You report no income or not all of your income.
- Your tax return involves issues with other taxpayers whose returns are being audited.
- Other reasons: reporting too many losses, deducting too many work expenses and claiming too many charitable contributions may also trigger an audit.
Always be Prepared
Use your past tax return as a checklist of items to keep on hand:
- A copy of your signed tax return and all supporting documents
- Worksheets that support your return
- Forms W-2
- Forms 1099 (all versions)
- Forms 1095
- Business Forms K-1
- Canceled checks of deducted items
- Receipts supporting deducted items
- Itemized deduction support
- Child care receipts and reporting documents
- Bank statements
- Investment statements
- Mortgage statements
- Credit card statements
- Major purchases or sales
- Receipts for any charitable donations
- Proof of fair market value for any inherited items
- Mileage logs for business, charitable and medical transportation
- Business meals and cellphone use documentation
- Educational expenses
FYI: Always use copies of records during an audit. Keep your original documents.
More ways to prepare: Check IRS.gov to review its Audit Techniques Guides (ATGs). They are used by IRS examiners and can identify areas for potential audits, as well as help you understand what the IRS may question.
What to Do if you're Audited
Your tax return may never be audited. But if it happens, here are a few tips to make the process go more smoothly:
- Respond to the IRS in a timely manner. If you don’t, an in-person meeting may happen.
- Ask for help. NEVER tackle the IRS alone!
- Know what is being asked. Get a clear understanding of the core questions.
- Understand how the auditor has been trained. IRS auditors are trained in certain areas. These are published in the ATGs.
The bright side: If you are audited, you may end up with a refund. In FY 2018, approximately 30,000 audits resulted in refunds, totaling $6 million.
Sources: IRS.gov, Kiplinger.com, Forbes.com, Nerdwallet.com