Understanding IRS Audits
The Internal Revenue Service (IRS) conducts audits to verify the accuracy of tax returns and ensure compliance with tax laws. While the IRS aims to audit a representative sample of taxpayers, certain factors can increase the likelihood of an audit.
Factors Influencing Audit Selection
- Income Level: Higher-income earners are more likely to be audited than lower-income earners. According to research from Syracuse University, millionaires have the highest audit rate among all income brackets.
- Errors or Missing Information: Errors or incomplete information on a tax return can trigger an audit. Common errors include mathematical mistakes, incorrect deductions, or missing documentation.
- Random Selection: The IRS also randomly selects tax returns for audit to ensure fairness and prevent bias.
- Linked Returns: If your tax return is linked to someone else who is being audited, such as an investor or business partner, you may also be audited.
- Low Income and Earned Income Tax Credit (EITC): Despite the lower overall audit rate for low-income taxpayers, those claiming the EITC have a higher chance of being audited. This is because EITC audits are generally less complex and less likely to result in litigation.
Racial Disparities in Audits
A study by Stanford University found that Black taxpayers are disproportionately audited compared to non-Black taxpayers. This disparity is particularly pronounced among single Black men with dependents who claim the EITC. The researchers attribute this disparity to factors such as budget cuts, reliance on correspondence audits, and the IRS’s focus on targeting individuals receiving refunds rather than those committing tax evasion.
Statute of Limitations for Audits
Generally, the IRS can audit returns filed within the last three years. However, if a substantial error is identified, the IRS may extend the statute of limitations to six years. The IRS may also request an extension of the statute of limitations if an audit is not resolved.
Record Retention
To prepare for a potential audit, taxpayers should retain their tax records for at least three years. However, it is recommended to keep records for six or seven years to cover all potential scenarios.
Additional Resources
What the IRS is actually looking for that could trigger a tax audit
FAQ
Who gets audited by IRS the most?
How does the IRS decide who gets audited?
How hard is it to get audited by the IRS?
What percentage of tax returns are audited by the IRS?
In recent years, the IRS has audited significantly less than 1% of all individual tax returns. Plus, most audits are handled solely by mail, meaning taxpayers selected for an audit typically never actually meet with an IRS agent in person. Also, increased audits won’t happen overnight.
When does the IRS conduct a tax audit?
The IRS conducts audits when it finds something wrong in a tax return or suspects an outright evasion of income. What are the chances of getting audited? The IRS uses random selection for tax audits. Its DIF (Discriminant Information Function) is designed to detect possible tax evasion cases.
What happens if you get audited by the IRS?
Additionally, the IRS says that having an association with someone else who’s under investigation could also yield an audit. Taxpayers who have made transactions with someone else under audit may also be chosen. What happens if you get audited? In the end, the IRS says that there are three possible outcomes from an audit. There could be no change.
What happens if the IRS decides to audit your tax filings?
If the IRS decides to audit your tax filings, you will get a letter in the mail. The IRS never informs an individual about an audit over the phone. You shouldn’t ignore an audit notice from the IRS. Individuals must fully comply with all of the requirements. There are three main types of IRS audits.