One word that can make taxpayers cringe is “audit.” Fortunately, chances are slim that you’ll experience an audit: In 2011, the IRS audited just over 1.5% of returns. However, certain triggers can boost the likelihood that your return is among those targeted.
How do you get chosen for an IRS audit?
There are several red flags that can trigger an audit. Your return may be selected because the IRS received information from a third party — say, the W-2 submitted by your employer — that differs from the information reported on your return.
In addition, the IRS scores all returns through its Discriminant Inventory Function System (DIF). A higher DIF score may increase your audit chances. While the formula for determining a DIF score is a well-guarded IRS secret, it’s generally understood that certain things are more likely to increase the likelihood of an audit, such as a traditionally cash-oriented business, tax shelters or a home office deduction.
Bear in mind, though, that no single item listed will cause an audit. Indeed, a relatively low percentage of returns are examined. One of the biggest factors in determining the likelihood of an audit, in fact, is your income. For instance, according to IRS statistics, if your adjusted gross income topped $1 million, your return had an 8.4% chance of being audited in 2010 and increased to 12.5% in 2011.
Finally, some returns are chosen as part of the IRS’s National Research Program. Through this program, the IRS studies returns to improve and update its audit selection techniques.
Understanding the IRS Audit Process
Should your return be chosen for an audit, it helps to know what to expect and implement a few steps that can smooth the process.
Correspondence Audits: Nearly three-quarters of audits are correspondence audits and are completed via mail. The IRS may ask for documentation on, for instance, your income or your purchase or sale of a piece of real estate. (Be aware that the IRS won’t contact you via e-mail for an initial appointment. Contact related to being selected for an audit will be made via telephone or mail only, according to the IRS.)
In-person Audits: In-person audits may take place at an IRS office, your home or place of business, or at the offices of your CPA, attorney or tax preparer. If the proposed time and date are inconvenient, you can ask to reschedule. But the IRS has final say over when, where and how the exam will take place.
Receiving an Audit Notice: If you receive an audit notice, read it carefully. Most will indicate the items to be examined, as well as a deadline for responding. A timely response conveys that you’re organized, and thus less likely to overlook important details. It also indicates that you didn’t need to spend time pulling together a story.
- Before responding to the notice, however, confer with your CPA or tax professional. He or she can calm any jitters and help you prepare your response. If the exam will take place in person, he or she can accompany you — or even appear in your place if you provide authorization.
- If you’re going to meet in person, ask what documents the auditor is expecting, and what questions will be discussed. Of course, you’ll want to prepare this information and bring copies (not originals) of all that’s requested. You generally don’t want to bring more to an audit than what’s been requested, as it may prompt more questions. If an auditor asks about something that you didn’t prepare for, simply say that you’ll follow up.
- Similarly, answer any questions honestly, but don’t volunteer extraneous information that might lead to more inquiries. Talking about a recent, lavish vacation, for example, could suggest that your income is higher than it actually may be. Respond with “yes” or “no,” providing a brief explanation where necessary.
- Finally, mind your manners by being polite. While you don’t need to become friends with the auditor, a cordial relationship can help the process go more smoothly.
Ease the process
Being organized, timely and professional can reduce the stress of an audit. In addition, bringing in your CPA can mean spending less in the long run, as he or she can help you navigate the process.