It’s tax season again, which for many of us means a few hours of hunting down our W-2s and hoping for the best. Once you’ve filed, you’re off the hook for another year…unless, of course, you get audited.
If this happens to you, don’t panic—being audited doesn’t mean you’ve done something wrong or that you owe penalties. As long as you filed your individual or business taxes correctly and have the receipts to back it up, you should be just fine. Fortunately, the Internal Revenue Service (IRS) only audits a tiny fraction of tax returns each tax season. Unfortunately, the IRS is set to increase small business tax audits starting this year, and there’s not much you can do to stop an audit once you’re singled out to receive one. Just in case you end up being audited this year, here’s a quick list of things you should know:
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What is a tax audit?
A tax audit is the IRS’s way of verifying that the taxes you’ve submitted were accurate. If you can prove that your taxes were filed correctly and the numbers you reported were true, you’re generally all set.
If I’m audited, does it mean I owe the IRS more money?
No, not necessarily. If you filed your taxes correctly, you may not owe a thing. But if the IRS finds an error, intentional or otherwise, you may end up owing back taxes or penalties.
How can I decrease my chances of being audited?
File your taxes: This is the biggest one. If you haven’t filed your taxes for a year or more, you’re essentially begging the IRS to audit you.
Record every payment, especially if you are self-employed: Your income is a big piece of what makes you “auditable,” so if your income is significantly lower or higher than the average household, it will increase your chances of getting audited.
While you can’t exactly change your salary, you can make sure you’ve entered everything correctly. If you have multiple revenue sources (for example, if you freelance), it can be hard to keep track of all the income you earn in a year, so you’re more likely to leave out a payment. Keep thorough records and make sure you record every payment.
Check your deductions: If you made any significant charitable contributions, you’re eligible for some well-deserved deductions. However, if the deductions are suspiciously high, you’re more likely to get audited. (We’re not saying you shouldn’t give generously, but if you gave 80% of your income to charity last year, you could pique the interest of the IRS.) If you’re claiming a home office deduction, make sure you’ve actually designated a section of your home strictly for business purposes.
Keep spotless records: The IRS can audit you as far back as three years, so make sure you keep at least three years’ worth of tax returns and files. It’s also a good idea to keep a folder of your paystubs and categorize your bills and receipts from all work purchases during the year.
What are the different kinds of tax audits?
Mail audits: These are the most typical and the least invasive kind. They may be limited to a question from the IRS about a specific deduction or a charitable gift, and once you submit your records, you could be all done.
Office audits: During an office audit, the IRS will ask you to visit them at their offices, and may ask you to bring certain files.
Field audits: If something from your records looks suspicious, the IRS may send someone to your home or business to look things over.
What should I do once I’m notified?
Don’t ignore the notice—that won’t make it go away. Get in touch with a tax attorney and secure legal representation. Then make sure to stay on top of requests from your IRS auditor.
Solid preparation and organization will get you through any audit. If you have any additional questions, you can always Ask a Lawyer for help.
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.