The number of audits by the IRS has been edging upwards. According to the Daily, since 2009, the number of annual audits has increased by 12%. With tax revenues down since the credit crisis, the IRS has become more aggressive about seeking out potential problems.
The Audit Process
The IRS chooses tax returns to examine in-depth in a variety of ways, including certain tax practices that raise red flags, computer scoring (where computer analysis indicates that the tax return seems incorrect), or if a business partner or investor has also been chosen for auditing.
The process is a review of all the documents related to your tax return, such as receipts and invoices. Because mismatched tax documents (like your tax return not matching what your employer reported on their taxes) can trigger an audit, it is important to go over the original documents. The IRS will notify you of specific documents that you need to present.
You can choose whether to represent yourself or have a tax professional accompany you. Depending on the situation, you may be able to complete the audit process via mail or you may need to complete an in-person interview with an IRS agent. You have the right to appeal any decision reached by the auditor.
What You Need to Survive an Audit
In order to survive an audit, or even come out with a refund, it's important to keep accurate records now, rather than trying to sort through boxes of old documents down the road. At a minimum, you need records to be able to prove the deductions you claim on your tax return, as well as records of your income. Keep three years' worth of records and organize them as you go.
In the event that your tax return is audited, it's usually a good idea to bring in a professional, such as a CPA or a tax attorney. Professionals familiar with the audit process can help you move through it quickly.
It's also important to make sure that you address the issues behind the audit and nothing more. Provide only the records the agent conducting the audit requests and don't volunteer information. While it's important to be helpful, volunteering unrelated information or records can sometimes result in new investigations, beyond the original scope of an audit.
How to Avoid Being Audited
Before you worry too much about an audit, take a look at your gross income. In 2010, almost one-third of taxpayers bringing more than $10 million per year were audited, but less than 1% of taxpayers earning below $100,000 were audited. There is still an increased chance of audits in general, but the chances of an audit are still low overall. In total, 1,724,728 tax returns were audited in 2011, out of 184,596,616 tax returns filed.
The Bottom Line
You can also reduce your chance of being audited with a few simple steps. Most importantly, review your tax return for any errors: math errors routinely force the IRS to do an audit. Regardless of whether you use a tax preparer, double check the math and other details (like whether you've signed your tax return), before sending it off.
There are also certain deductions that can catch the IRS' attention, particularly because there are more opportunities for abuse or errors. The two deductions that are particularly likely to catch an auditor's eye are those for donations and home offices. By making sure that there are no potential problems with those two deductions on your return, you'll decrease your chances of being audited.