There are plenty of audit myths floating around, but that’s all they are – myths. In this article, we will take a close look at some of the more prevalent tax audit myths out there. For each myth, the truth will be revealed, so you can know exactly what to expect during an audit.
Understanding what is involved in an IRS tax audit can help alleviate any fears you may have. Also, by understanding what the IRS does look for, you can better reduce your chances of getting audited. Of course, if you are concerned about an upcoming audit, hire a tax consultant to represent and advise you.
Myth #1: “I should be afraid of a tax audit.”
First, you shouldn’t be afraid of an audit. Most audits are processed through the mail. This is called a Correspondence Audit.
While the IRS does have in-person (field) audits, usually at an IRS office, the majority of them are done as correspondence audits. In fact, about 75% of all audits are done through the mail.
Second, the correspondence audits usually just ask you a few questions, try to verify some information you have on your tax return, or just need some additional information from you.
If you do need to provide additional information, be sure you have your records put together where you can find them. In case you are audited, you should know the records the IRS may request, such as mileage logs, which may be relevant if you are doing rideshare driving or food delivery driving.
Finally, most audits are just about a discrepancy between the numbers you reported on your tax return and your records. The IRS just wants to make sure that what you file on your tax return is the correct information. Usually, that is all there is to it; typically, no penalties or negative consequences occur.
Being audited doesn’t have to be a stressful event. If you feel too concerned about it, have proper representation with you. This should help put your mind at ease.
Myth #2: “If I take certain tax credits or deductions, I will be triggering an audit.”
Taking tax credits and deductions is not a bad thing; they are tax advantages you should take, if applicable. Many people worry about taking the home office deduction. However, lots of taxpayers take the home office deduction and are not audited.
For more information about this deduction and others that you can claim on Schedule C, check out this article.
As long as you take tax deductions and credits legally, you should be fine with the IRS. Just make sure you have the backup to support the deductions and credits you are taking because if you do get audited, auditors focus on the supporting material and accuracy more than anything else.
It’s not really the number of deductions you take that triggers IRS audits; it’s more the likelihood of the amount of the deductions you take. For example, watch the charitable deductions. If you take more charitable deductions than what your small business earns, that’s a little suspicious.
If you do want to maximize your charitable deductions, go for it! Just have the backup to support it. Make sure you have the paperwork to support all the deductions and credits that you are taking on your tax return.
Also, it’s not so much the number of deductions and credit you take, provided they are in line with similar tax returns. You see, the IRS uses an automated system that looks for serious irregularities.
The IRS compares your tax return to similar ones to see if there are any irregularities. They look for things that are out of place, things that are not ordinary for taxpayers who had similar incomes and deductions.
Just take your deductions and credit legally, and you should be fine. If you are unsure as to what you can write off on your tax return, meet with a qualified tax consultant to find the best solutions for you. A tax accountant can help you maximize your benefits on your tax return while keeping your head above water with the IRS.
For true audit triggers for small businesses, check out this article.
Myth#3: “Tax returns that are prepared by tax professionals are audit-proof.”
There are many tax preparers out there who guarantee the biggest refund possible. These tax professionals may be trying to keep this promise at the expense of doing an accurate, ethical job on your tax return. In other words, there are some tax professionals who are less scrupulous than others, so watch out for tax return scams.
Having a tax preparer help you with your taxes has no bearing on whether you will be audited or not. Most audits are the result of a computer algorithm that notifies the IRS of any suspicious activity.
As mentioned in the last point, the DIF computer system the IRS uses automatically compares your tax return with those who have submitted similar ones and decides from there if there are any irregularities with your tax return.
Using a qualified tax professional to complete your tax return should help you take the best deductions, complete your tax return properly, help you submit the right forms, and assist you in staying organized each year.
Myth #4: “Taxpayers with low income won’t be audited.”
It’s true that those who make more money get audited more than those in the low to medium-sized tax brackets. While the chances are slimmer, it doesn’t mean you won’t get an audit due to the amount of money you claim.
The statistics reveal the truth. For those who make less than $500,000, the chance of getting audited is less than 1%. This number has slowly decreased over the years as the funding for audits has decreased.
Now, if you report over $500,000, the chance of an audit increases to over 1%. If you have an adjusted gross income of more than $10,000,000, the chance of an audit increases to over 6.5%. Audit resources are limited, and they don’t waste time.
So, while the chances of getting an audit are low for the medium to small-income tax returns, you aren’t off the hook. In fact, no one is completely exempt from an audit. This includes people who don’t turn in a tax return when they should.
Myth #5: “Audits happen right after you turn in your tax return.”
Audits begin a few months after the deadlines for tax returns. In most cases, audits don’t happen until years after tax returns are submitted. So, during this time, which is a long time after you actually submit your tax return, you may be audited.
However, there are exceptions to this time frame. For example, if fraud is suspected, the IRS can go back indefinitely to audit you. Because you may have to prove to an auditor why you took the deductions or credits that you did, it’s a good idea to hold on to tax returns and all supporting documentation for at least 7 years.
For a complete guide on what records you should keep and what to toss and more on the three-year rule, check out this record retention guide.
Myth #6: “Audits mean you have to pay money.”
Audits rarely end up with the IRS collecting additional tax. Usually, auditors are not concerned with nit-picking details. Rather, they want to make sure what you have recorded on your tax return matches up with what they show and what your records reveal.
Through auditing, the IRS has actually found billions of dollars in refunds! So, being audited can be a good thing. Know your rights as a taxpayer to be sure the IRS is within its rights to request more money from you. Have a tax professional represent you during an audit, too.
Taxpayers have the right to pay only what is due to the IRS, nothing more. As long as you pay what you legally owe, you should be in the clear, but go ahead hold on to your tax returns and backup material for the allotted time.
Myth #7: “The IRS is going to take my belongings and put me in jail.”
People are not jailed for owing the IRS money, but they can go to jail for cheating the IRS. However, there are repercussions to not paying your tax bills, like wage garnishment and property liens. But, remember the IRS wants to help; they will work with you on payment plans and other solutions for your tax debt.
Myth #8: “I received a tax refund, so now I am in the clear.”
Receiving a tax refund just means the IRS has received your tax return; it doesn’t mean that you are in the clear or that the IRS will agree with what’s on your tax return. Focus on correctly completing your tax return, and that will more put you in the clear than receipt of your tax refund.
Conclusion
If you have heard of these myths before reading this article, hopefully, you now understand why these rumors aren’t true. Instead, you now understand that an audit is nothing to fear, providing you aren’t doing anything illegal.
If you are expecting an audit and want to make sure your taxes are done properly, contact an appropriate tax professional. For your complete guide to surviving an IRS tax audit, check out this resource.
Are you facing an audit or expecting to face one in the future? Be prepared in the event of an audit. You can do this by having the proper documents ready together and organized.
If you need audit representation, tax preparation, or business consultation, please reach out to Borshoff Consulting! We are more than happy to help you with your business needs.
Prevent the IRS from targeting you and make sure you understand your rights as a taxpayer. One such right is the right to have a representative during a tax audit.
If you would like such assistance, contact Borshoff Consulting! You can trust Indiana’s tax expert, so hire yourself an excellent tax accountant today!
