Of the nearly 200 million tax returns filed with the IRS in 2017, less than 1 percent were audited. But this is 2019, and if the numbers level out much the same, that means roughly 1.1 million returns will be flagged for review this tax season.
So who’s likely to get audited and what’s in store if you do? Certified Personal Accountant and Austin College professor Shannon Cornelison-Brown explains.
What exactly is an IRS audit and who’s likely to be audited ?
“Really, when the IRS is auditing, they’re looking at international individuals, large corporations and individuals with a high net worth,” says Cornelison-Brown. “Those types of returns are more likely to have an error or some sort of omitted information, which is essentially what an audit tries to identify and correct.”
Cornelison-Brown says the the IRS calculates tax liability with income figures reported by the Social Security Administration, and the majority of audits arise from discrepancies between an individual’s self-reported income and the SSA-reported income. Random audits also remain a possibility.
How does an audit work?
According the IRS’s online Data Book, roughly 70 percent of all audits conducted in 2017 were done by mail correspondence, while the remaining 30 percent were conducted in the field. Cornelison-Brown said those who receive an initial mail notification of an audit have 30 days to respond to the correspondence, which may seek additional financial information or documentation. Assets and accounts are rarely frozen but may be seized after multiple correspondences or requests are ignored.
Letters may also state an IRS-assessed tax liability, but Cornelison-Brown says that may not be the final figure an individual has to pay. While Cornelison-Brown said it’s unlikely for an audit to result in added money in one’s pocket, the IRS issued $6 billion in additional taxpayer and business refunds following 2017’s audits.
What should you do if you are audited?
“The natural thing for people to want to do, when they see a letter from the IRS, is hide,” says Cornelison-Brown. “But the worst thing you can do is not respond. If you don’t respond within those 30 days, then the agency will move forward with the assumption that they are correct, and that’s not always the case.”
Instead, filers should immediately begin the search for documentation. Cornelison-Brown says while thorough documentation can help clear up the confusion surrounding an audit, familiarizing oneself with recent statements and expenses before filing can ensure more complete and accurate tax returns.
“I think, sometimes, people just want to file their tax returns quickly and get them out of the way,” says Cornelison-Brown. “As a result, they’re quick to gather documentation and they don’t necessarily look close enough at their financial history or note any potential financial changes from that year, which might affect their returns.”
Cornelison-Brown said all mail sent to the IRS should be certified in order to ensure correspondences are received and a paper trail of compliance is created. Those with concerns about their taxes are advised to seek the services of a trusted tax accounting professional.
“It’s probably too late for this year, but don’t wait until right before the deadline, next year,” says Cornelison-Brown. “Do us that favor.”