What Is an IRS Audit and Who Gets Audited? What You Need to Know

What Is an IRS Audit and Who Gets Audited? What You Need to Know

Receiving a letter in the mail from the Internal Revenue Service is not something many people look forward to. This is usually because they are afraid of being audited by the IRS. However, there are many misconceptions about what an audit actually is and who is audited.

The IRS received a huge financial boost as part of the Inflation Reduction Act of 2022 that gives the agency an additional $80 billion over 10 years, expected to increase federal tax revenue by more than $200 billion. More than half of these funds Enforcement will be directed, according to accounting firm PricewaterhouseCoopers, which says the IRS expects “a substantial increase in examinations of large corporations, partnerships and high-net-worth individuals.”

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We'll explain the different types of audits sent by the IRS, and who is usually audited. For more tax tips, find out about common mistakes that can be made. Get your audit done. and tax breaks This can get you a higher refund..

What is an audit?

There are three types of notices the IRS traditionally sends: adjustment letters, related audits, and examination audits.

Letters of Adjustment Simply tell taxpayers that they owe extra money or that there is a change in the amount of their refund, usually due to a miscalculation.

“People get a letter from the IRS and they automatically freak out and think it's an audit, but it's really just an adjustment letter,” TurboTax tax expert Lisa Green Lewis told CNET.

Audit of Correspondence A little more involved. This lets taxpayers know that additional documents are needed to complete their return. The IRS may demand Receipts, bills, employment documents, canceled checks, legal documents, loan agreements, shareholder reports or ticket stubs.

A test audit What people really dread, but according to Tax Resource Director Joe Willetts, less than 1 percent of Americans are audited in a given tax year. Jackson Hewitt.
“Usually the IRS says 'if you have the documents, send them to us,'” Willetts said. If you receive a letter, he added, you may want to ask a professional.

Face-to-face exam can take place At your home, your workplace, your lawyer's office or the IRS office.
When the audit is complete, the auditor will determine what is necessary to correct the situation. If you disagree with their assessment, There is an appeal process..

Some of the issues that get flagged are no big deal, “and the IRS isn't always right — or not,” Willetts said. completely Okay fine.”
In 2018, there were 30,000 million or more audits that resulted in taxpayers Refund of excess amount.

“It's always a pleasure to resolve an issue with the IRS in the taxpayer's favor,” Welts added.

Who does the audit?

According to General Accounting OfficeAudit rates among all income levels have declined in recent years, in large part due to lack of funding.

On average, the probability of being audited decreased from 0.9 percent in 2010 to 0.25 percent in 2019.

Errors or missing information There is a surefire way to get a notice from the IRS on your return. Audits can also be triggered randomly, or if your return is linked to another audit, such as an investor or business partner.

But those with higher incomes may face increased scrutiny. The odds increase for those reporting income above $200,000, according to research by Syracuse University Published in January, millionaires are the most likely to be audited out of any income bracket.

Declaring little or no income is also a red flag. The audit rate for the lowest-income Americans was 1.27%, five times the national average.
“Lower-income audits are generally more automated, allowing (the IRS) to continue conducting these audits with less staff.” GAO report from May 2022.
Taxpayers with incomes greater than $25,000 and less than $500,000 have been audited the least in recent years, according to IRS data.
In August 2022, Treasury Secretary Janet Yellen said Small businesses or households that make $400,000 or less annually “will not increase their likelihood of being audited.”

Danny Werfel, President Joe Biden's nominee for IRS commissioner, reiterated that commitment At his Senate confirmation hearing in February.

IRS Commissioner-designate Danny Werfel IRS Commissioner-designate Danny Werfel

IRS Commissioner nominee Danny Werfel at his Senate Finance Committee nomination hearing.

Anna Rose Leyden/Bloomberg/Getty Images

Is there racial bias in being audited by the IRS?

Blacks are taxpayers. disproportionately likely to be audited., according to a Stanford University report released in January. The research team found Black taxpayers receive audit notices. At least three times more than non-black taxpayers.

Depending on their income, household size and filing status, they may be 4.7 times more likely to be audited.
Stanford law professor Daniel Ho, who led the research, said the disparity is likely not intentional but the result of cost-cutting measures and secret algorithms governing the IRS's audit selection methods.
According to Ho's team, budget cuts have cost the agency more than 20 percent of its examiners over the past 10 or so years, many of whom had the expertise necessary to investigate complex tax issues. As a result, audit rates have declined for higher tax brackets while lower income taxpayers have not.
The IRS also tends to favor correspondence audits, which are “easier to conduct, cost less and require minimal effort on the part of IRS personnel,” than in-person field audits, the researchers said. I, the researchers said. Some 70% of IRS audits are by mail.
The researchers found that the Dependent Database, which the IRS uses to flag problems on returns and generate automated letters, home in on errors involving refund eligibility rather than errors related to high dollar amounts.
For example, half of all IRS audits involve taxpayers claiming the Earned Income Tax Credit.

According to Ho's team, EITC-related audits “target low-income individuals whose tax returns are less complex and less likely to be litigated.”

The program will also target claimants who do not have business income as they are cheaper and easier to resolve.
Black taxpayers make up only 10% of EITC claimants reporting business income, the report found, but 20% of EITC claimants who do not.

be said in a statement.

These factors do not account for the full disparity in who gets audited, the researchers said. Black taxpayers accounted for 21% of EITC claimants, for example, but were the focus of 43% of EITC-related audits.

The disparity persists regardless of gender, and marital or parental status, but is most pronounced among single black men with dependents who claim the EITC. They are 20 times more likely to be audited as non-black couples filing jointly and claiming the same credit.
The researchers said they believe the IRS is under pressure from lawmakers to crack down on people who illegally receive refunds for tax evasion.
Filers who claim the EITC can get a refund even if they didn't pay any taxes that year.

“We're not treating the dollar that's going toward the earned income tax credit as the same dollar that could be avoided by higher-income taxpayers,” Ho explained. USA Today. “If we treated them the same way, our evidence suggests that the disparity would be significantly reduced.”

How far back can the IRS go to audit a return?

Generally, the IRS will include returns filed within the last three years in an audit, with most returns audited within the last two years.
“If we identify significant impairment, we may add an additional year,” according to Agency websiteadding that it usually doesn't go back much further than the last six years.
If an audit is not resolved, the IRS may request an extension of the statute of limitations to assess additional taxes and fees, usually three years after the return is paid, whichever is later. .
According to the IRS, the auditor does not have to agree to an extension of the statute of limitations. “However, if you do not agree, the auditor will be forced to make a decision based on the information provided.”

How long should you keep tax records?

Since the IRS typically looks at returns for the past three years, it's a good rule of thumb to keep your records for at least that long.
Six or seven years is fine if you really want to cover your bases, Willetts said.
The government has six years to claim the income or start legal action if your return includes a “substantial loss of income,” which means, American Bar Association, is at least 25% of your gross income. However, if the IRS makes a case that you willfully committed tax fraud, this six-year deadline does not apply.

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