Why am I Being Audited?
The IRS has several methods by which they identify which returns or which taxpayers should be audited.
- One common reason that individual and small businesses get audited is because of information reported to the IRS by third parties may not match information reported by a taxpayer. For example, if you file your income tax return and fail to report the proceeds from the sales of stock, you will receive a letter within about a year or less that proposes an increase in your taxable income by the amount of the proceeds you received from the sale. The IRS will not give you the benefit of deducting the cost of the stock against to proceeds to determine your taxable gain. Unless you respond to this notice within 30 days (or ask for an additional 30 day extension) they will be expecting you to pay the income tax, interest and possibly penalties based on what is usually a much higher amount.
- Another way the IRS will choose returns for audit is by the results of a computer scoring program which rates each return’s potential for adjustment. The IRS will compare your tax return with statistics they compile from other taxpayers with similar tax returns. The more your tax return deviates from the statistical “norm,” the greater chance it will be chosen for an audit.
- Related examinations of business partners or co-investors who are selected for audit may result in the IRS deciding that your return may have potential for adjustment as well. Let’s suppose you are a partner in a partnership and the partnership tax return is examined by the IRS. If the audit results in an adjustment affecting all partners in that partnership, and you fail to adjust your tax return accordingly, the IRS may decide to examine that particular item on your taxes as well as pick other items they find questionable.
- Whenever the IRS identifies fraudulent tax return preparers there is a significant possibility that they may decide to audit many or all of the tax returns prepared by that firm or individual. These preparer based audits usually prove to be very profitable for the IRS. Selecting a reputable tax preparer is probably the most important decision you can make with respect to filing your income taxes.
- Your local IRS field office may identify specific information reported in newspapers or via television and radio media that may cause it to take notice of certain taxpayers or a class of taxpayers. For instance if the IRS learns of a taxpayers being convicted of illegally selling drugs they may decide to see if the proceeds from the sales were reported as taxable income!
If you’ve done a diligent job in completing your tax return, whether yourself or with the help of a paid preparer, then you can expect that if your audit handled correctly, if will result in little or no change. Having the proper representation during the audit process can be the difference between a small inconvenience and a major headache!