There’s plenty of misinformation circling around out there about IRS audits. It’s time to clear the air and get the facts.
A Different Kind of One Percent-er
Research and hard facts tell us everything we need to know – less than 1% of the tax-paying population whose annual earned income falls between $15,000 and $100,000 experience an IRS audit each year. The odds are that slim.
When you combine the small chance of actually being audited with being accurate and honest on your tax return, your anxiety about being audited should begin to diminish.
In fact, IRS Commissioner John Koskinen said the IRS will audit 100,000 fewer individuals this year as part of congressionally mandated cuts to the tax agency’s budget. Congress in January cut the IRS’s budget by $526 million, or 4 percent, to $11.9 billion for the current fiscal year. In 2013, total IRS audits fell by 5 percent from 2012 to reach the lowest level since 2008.
Myth #1 – The Life-Shattering Audit
One of the most circulated myths about an IRS audit is that an audit will destroy your life. In most cases, however, an IRS audit can be taken care of by answering a few questions about your finances.
Answering a few questions to clear things up is miles away from destroying your life. Correspondence from the IRS should be taken seriously, however an audit letter doesn’t have to send you running for the hills.
Plus, not all correspondence received from the IRS is an audit. The best thing to do when you receive a letter from the IRS that you don’t understand is to contact your Dallas CPA. We can review the letter and let you know what type of action, if any, is necessary. We can even respond to the IRS on your behalf.
Myth #2 – Mistakes Equal an Audit
Although it’s not a good thing to make a mistake on your tax return, it surprises some people to learn that an incorrect tax return doesn’t automatically generate an audit. You can revise your 2013 return before the IRS catches the omission in its matching program and bills you for additional tax, penalty and interest – or to take advantage of a deduction or credit that was originally missed.
While April 15 is the statutory deadline for filing your return, you have three years from the due date of the return, including extensions, – or two years from the date you paid the tax, whichever is later – to “amend” the return and get an additional refund.
Do not file an amended return until the original return has made its way through the system. If there was a refund due on the original return wait until you have received and cashed the refund check.
The IRS uses the Discriminate Function (DIF) system to compare your return, including your deductions, income, credits, and dependents, to the average amount of the same categories for taxpayers who have similar jobs, incomes, and household situations.
Myth #3 – All Letters Received are Audits
Many taxpayers think every letter received from the IRS is an audit, but actually not all correspondence received from the IRS is an audit. The IRS has three separate forms of communication and fact-checking when it comes to your tax return.
IRS adjustment letter – probably the simplest and least intrusive communication from the government regarding your taxes. Basically, the IRS will send you a letter notifying you that there was an adjustment due to a miscalculation or small typographical error.
Once you review the errors and agree with the adjustments needed, all you have to do is follow the instructions contained within the letter and you’re done.
A correspondence audit – basically an audit through the mail. You’ll receive a letter from the IRS usually asking for clarification about certain parts of your tax return. Once you supply the correct official documents requested by the IRS, usually documents confirming deductions and expenses, the correspondence audit will be satisfied.
An examination audit – Usually the product of an irregularity found by the DIF system. Some audits can be handled over the phone or through the mail, however you may meet with an IRS agent to finalize the procedure.
Just remember, an audit isn’t the end of the world – simply make sure you’re accurate, honest, and keep your receipts and records. However, working with a Dallas CPA to handle your audit can be invaluable. If you’ve received letters from the IRS, contact us today to schedule a consultation.
