If you’ve just opened your mailbox to find an audit letter from the Internal Revenue Service (hint: the IRS), you’re probably wondering what comes next. There are a few things you’ll want to do — and know about — before the audit process gets into full swing.
The IRS, aka the gov’s tax collection agency, is always on the lookout to make sure that people are paying the right amount of tax. And, in the process, they choose certain people to check in on extra closely each tax year.
If you’re one of the (not-so) lucky ones, the letter you receive (psst…the IRS only contacts those chosen for auditing by mail and won’t call you) will explain the type of audit you’ve been selected for. You can expect an audit in one of three ways:
Sending your documentation by mail (the most common),
Meeting with someone at an IRS office,
Or conducting a field audit at your home or office.
It's not just you. In 2020, over 509,000 people were audited (down from about 1.5 million audited in 2010).But that's all still less than 1% of all tax filers. Read: Don't let audit fear keep you up at night.
What are your odds of being picked? Tax audits tend to happen on the far ends of the income spectrum. Example: In 2020, those earning less than $25,000 annually were 50% more likely to be chosen for auditing than anyone else on the income spectrum.
And there are a few reasons people are selected for audits. Two common reasons include:
Random selection based on a statistical formula
And related examinations for those with ties to others being audited.
The IRS is going to spell out what they want to see with a written request for certain documents. But here’s a shortlist of a few documents they often ask for, so you can start pulling them together now:
Employment documents. Things like your W-2 from work, education expenses, and reimbursements could be required.
Logs or diaries. Business owners, you might be required to provide some context for the things written off on your taxes, like miles driven, and travel expenses.
Loan agreements. Like for your mortgage or other loans.
Oh, and they’ll likely want copies if you’re dealing with a mail audit, so fire up the printer.
You could end up paying more— including taxes, fees, and interest back to the date you filed (incorrectly). So you’ll want to make room in your budget if you’re preparing for a tax audit.
You can appeal. But you may need some professional help to do so. Which could also cost some money. (Again, adjust your budget.)
Alternate ending to your tax audit story: The IRS could find that there’s no change necessary. And fade to black. Until next tax season.
You don’t have to fear a tax audit. If you’re chosen, gather your documents, prepare yourself for your audit, and prep your budget, just in case.
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