Four Myths — And The Truth — About IRS Audits
If you’re scared about the possibility of being audited, here’s some reassuring news for you.
What does it mean to be audited? Most people think of the word “audit” as one of the worst five-letter words in the English language. But in many cases, the fear of an audit is actually worse than the audit itself. It helps if you understand your rights as a taxpayer.
When the IRS audits your return, the IRS is basically looking to see if you correctly reported your information and paid the right amount of tax. If you look at it another way, it’s just another level of IRS review, with the goal of keeping the whole system fair.
If you reported your information correctly and kept good tax records, you have nothing to worry about.
Here are four common myths about IRS audits — and the truth behind them:
Myth 1: “The IRS is out to get me.”
The IRS selects returns for audit in different ways. Most of them are the result of a computerized review process, which has no bias against you personally. The IRS uses a software program that flags returns that could be incomplete or inaccurate, while other IRS programs randomly select returns for audit.
Mismatched information on your tax return is one of the easiest ways to invite extra IRS scrutiny. If your tax return reports income information that doesn’t match information the IRS has on file (like Forms W-2 and 1099), you’ll likely receive a CP2000 notice asking you to explain the difference.
This means if you receive any incorrect forms from a payer, it’s best to ask the issuer to fix the form as quickly as possible. A corrected copy will be sent to the IRS, hopefully solving the mismatch issue.
The IRS is more likely to audit certain types of returns, based on complex selection criteria. Learn more about common IRS audit triggers.
It’s also possible that another taxpayer’s audit could affect your tax return. For example, if you received a Schedule K-1 from a partnership and reported it correctly on your return, the IRS could audit the partnership and end up examining your return, as well. This type of audit is mainly designed to ensure complete and accurate reporting of information across returns that affect one another.
Myth 2: “An IRS agent will come knocking at my door.”
The most common type of individual tax return audit is a mail audit, also called a correspondence audit. The IRS will send you a notice asking you to respond with supporting evidence and documentation by mail to prove your tax return position.
In rare cases, the IRS will ask you to come in to a local IRS office for a review of the return. These are called office audits.
And in extremely rare cases, the IRS will conduct a field audit, where an IRS agent will review your tax records at your home or business. In these more complex audits, many taxpayers seek expert representation help.
Myth 3: “I’d better pay up – or else.”
An IRS letter is not necessarily a bill. You have some work to do to show that what you reported on your return was right. But don’t break out your checkbook yet, if you can show that your tax return was correct.
An audit becomes a tax bill only if you:
- Agree with the proposed changes the IRS is making during the audit.
- Don’t respond to the notice by the IRS deadline.
- Don’t provide the IRS with records supporting your original return.
To make sure your IRS letter doesn’t become a tax bill, send in a complete and timely response to the IRS showing that you were entitled to claim all the income, deductions and credits you reported. When sending copies of information to the IRS, use certified mail so that you have confirmation that the IRS received the information.
On the other hand, if the IRS is correct and you’ll owe a tax bill, remember that the IRS offers a range of payment options.
Myth 4: “Now is not the time to deal with this.”
If you receive an audit letter or an IRS notice requesting information, now is exactly the time to deal with this. But don’t panic. There’s a process for dealing with IRS audits, and you can get expert help handling the issue.
But you do need to understand that if you miss the IRS deadlines in your letter, you could be giving up your rights to prove what you originally reported was correct and to dispute any additional taxes due. Read your letter carefully to see how long you have to respond, and start going through your documentation right away.
Need help determining worker classification? Read the IRS definition and get more insight from the tax experts at H&R Block.
Learn more about Letter 1085, why you received it, and how to handle a substitute for return with help from the tax experts at H&R Block.
Learn more about notice CP2005, why you received it, and how to handle the notice with help from the tax experts at H&R Block.
Learn more about letter 3404C, why you received it, and how to handle an IRS 3404C letter with help from the tax experts at H&R Block.