IRS Audits are no fun. Most taxpayers have at least some concern about the possibility of facing an IRS audit. You may be wondering how the IRS decides who to audit, how likely it is that you'll be audited, and what you can do to at least minimize, if not avoid, being one of the unlucky ones selected for audit - or how you can increase your chance of a successful outcome if you are audited.
You should never file a tax return without understanding what the IRS looks for that may trigger an audit. If you use a paid tax preparer, ALWAYS be sure you review your entire tax return BEFORE signing and filing. Remember, you, not the tax preparer, are the responsible party for what is and isn't reported on your tax return.
Your best protection against the IRS is to file an accurate and complete tax return. And, you MUST keep proper tax and financial records that back up of every item reported on your return. The IRS auditor is entitled to examine any and all your tax and financial records and statements you used to prepare your tax return, including bank statemente, brokerage statements, credit card statements, and supporting documents such as charitable receipts, vendor invoices, cancelled checks, auto mileage logs, cash deposits and cash payments, electronic records, and so on. This is why you need to keep good tax and financial records.
How Tax Returns Are Selected For Audit - Common Audit Red Flags The IRS Looks For:
1-Failing to report all of your income.
2-Reporting high income.
3-Reporting very low income.
4-Inconsistencies in amount of income reported from year to year.
5-Reporting self-employment income.
6-The nature of your business--working in or owning cash type businesses..
7-Reporting self-employment losses.
8-Reportig rental real estate losses.
9-Reporting capital losses when basis information is not provided by the financial institution.
10-Failing to report a foreign financial account.
11-Spending or depositing large amounts of cash.
12-Using round numbers ending in 00 on your tax return.
13-Reporting large deductions in relation to reported income.
14-Failing to report cryptocurrency transactions.
15-Claiming Head of Household filing status.
16-Claiming many dependents.
17-Reporting large gambling losses.
18-Taking large owner distributions from S Corproations, Partnerships, or Limited Liability Companies.
19-Failing to take a reasonable salary as the onwer of your Regular or S Corproation.
20-Filing an incomplete tax return (missing schedules, tax forms, or worksheets)
21-Failing to attach explanations for unusual items on a tax return.
22-Using a problem tax preparer on the IRS watch list.
23-Claiming tax credits without proper documentation.
24-Where you live--Living in a home or area that doesn't justify the income you report on your tax return.
25-A tip or referral from a private individual or government agency.
25-Bad Luck-a certain number of random tax returns are welected for audit each year.
Responding and Handling An Audit
You have the legal right to take anyone along with you to help you during an audit. If your audit is relatively simple and you are confident you are capable of handling it yourself, that should be all you need to do. If you situation is complex, if you do not understand what the IRS is interested or is questioning, or if you feel as though you need professional assistance, you should consider hiring an experienced and competent tax professional to assist you, someone who is familiar with your specific tax situaion.
Finally, regardless of the situation just described, it is critical that you respond as soon as possible. IRS audit notices do not go away by themselves.