A small piece of misinformation in your tax return may cause the IRS to examine your returns more closely. You might owe a certain amount of back taxes. In many cases, you can justify your original number. Also, most tax audits are directed at high income individuals and businesses.
To avoid any audits, it’s a wise idea to hire a tax professional to file your tax returns. However, if an audit occurs, it’s important to know and understand the 3 different types:
- Correspondence Audit: The most common type of audit, this occurs via postal mail, and the IRS will request any required documents.
- Field Audit: Completed for high income taxpayers or organizations, IRS agents come to your home or workplace to carry out a field audit.
- Office Audit: During an office audit, you must meet with an auditor to clear their doubts, presenting the required documentation and evidence.
It is a possibility that there’s no problem with your tax returns, but the IRS reserves the right to review your paperwork and records. You might even be eligible for a refund if everything checks out.
So how exactly does the IRS select which tax returns to audit?
Many audits are computer analyzed, but there are also other methods used to choose audits, such as:
- The Discriminant Function System (DIF): This is a computerized system that analyzes each tax return on the basis of several factors. The higher the score, the more accurate the return. Tax returns with low scores are suspicious.
- The Unreported Income Discriminant Function (UIDIF): This is another computerized system that checks whether a taxpayer seems to be spending more than he or she is earning, thus raising the doubt about an unreported source of income.
- The Information Returns Processing System (IRP): Since the IRS has a huge database of third parties who provide tax related information, like employers, brokerage firms, banks and more, it cross checks information from tax returns. If anything reported seems out of place, an audit is initiated.
- Audits of Related Entities: If an audit was initiated and problems were found, anyone related to those taxpayers or organizations is also audited.
Depending on the severity of the infraction, the IRS might also charge a penalty. The penalty is usually around 20% for under- or overvaluing property, neglecting IRS regulations, or understating your tax liability. Severe underpayments or fraud can result in a penalty of 75% plus interest or prison time, but this is rare.
To successfully make it through an audit, or completely avoid one, make sure tax returns are completely in order and that there are no gaps or missing or incorrect information in your financial documentation. The team at Long Island Tax Resolution can help ensure your documents are correct and in proper order. Furthermore, if you find yourself in the midst of an audit, our highly experienced tax experts will help you navigate the process with ease.