Basic Facts About IRS Audits

Basic Facts About IRS Audits

For the majority of taxpayers, April comes and goes with relatively little pain and results in a tax return. For others, the unlucky few facing an audit, the process can be difficult and the end result severe. What causes the IRS to decide an audit is necessary? How can one prepare for an audit? Even the most on-the-ball, well-organized taxpayers can make a mistake, and it’s important to have a good sense of what can happen.

While the odds of being singled out for an audit are relatively low, there are several red flags that catch the eye of the IRS. Some of the most common are excessive charitable or itemized deductions, inaccurate W-2 or 1099 reporting, egregious business expenses, and complex business or investment transactions. Tax-shelter losses or a withholding of cash receipts are also high on the list, and if you’ve been audited before, it’s more likely to happen again so as to deter fraudulent behavior. A tip from an informant could also lead to an audit, but not before other fact-checking into the legitimacy of the claim.

A taxpayer should take care to keep accurate records, with or without the looming threat of an audit. There are many ways to develop and maintain good record-keeping habits, starting with good organization. As is customary, maintain records and tax returns from the last three years. Monthly accounting, as opposed to saving all the work for April, can be a great way to stay on track. Keeping and categorizing your receipts and pay stubs, organizing your bills, and logging all your deductible items as they occur are great ways to arm yourself with a well-prepared body of information should you ever face an audit.

In the event of an audit, review the details of your past returns, and organize your data in a manner supportive of any items called into question. During any examination of the information you’ve compiled, volunteer only the information specified in the audit notice, as you could otherwise be opening yourself up for another investigation. While the bulk of this can be done on your own, it would be wise to have a enlist the aid of a lawyer or CPA.