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Common Misunderstandings about IRS Tax Audits
As a leading nationwide tax relief company, Brightside Tax Relief understands how IRS audits work better than anyone. In our experience, many of the fears surrounding IRS tax audits stem from common misconceptions about the process. In this blog post, we’re setting the record straight about the realities of IRS tax audits, which are often more reassuring than many believe.
Diving into the Details of an IRS Audit
An IRS audit is a review of an organization’s or individual’s accounts to ensure information is being reported correctly. Despite the fear they inspire, audits are relatively uncommon. In fact, less than 1% of taxpayers are subjected to IRS audits each year. If you receive an audit notice, it may be because some of your financial information appears out of the ordinary, causing the IRS system to flag it for review. However, receiving such a notice does not automatically imply wrongdoing, as many believe.
Understanding the Audit Selection Process
• The selection for an IRS audit does not occur at random. Rather, the IRS uses statistical algorithms to select potential audit candidates, focusing on apparent discrepancies or anomalies.
• Your lifestyle and reported income should be logically consistent. If reported expenses far exceed reported income, this could raise a red flag.
• Business owners who file Schedule C, Profit or Loss from Business, and report a loss for three out of five years, may attract the attention of the IRS.
• Large, unusual, or unexplained items on your return may also trigger an audit. However, if you have legitimate reasons for these items and sufficient documentation to back them up, there’s no need to worry.
In understanding how the system works, fear and uncertainty can be significantly reduced.
Tackling the Myth of Aggressive Auditors
Another common fear is the intimidating IRS auditor. In reality, most auditors are simply doing their jobs in clarifying unexplained items on your return. This process often happens through the mail and can be concluded without an in-person meeting. Furthermore, you always have the right to representation by a tax professional during an audit.
Understanding the Types of Audits
Not all audits are the same. The IRS conducts three types: Correspondence audits (which are conducted by mail), Office audits (which are held in an IRS office), and Field audits (which take place at the taxpayer’s home, office, or accountant’s office). Most are Correspondence audits, which deal with minor issues like math errors or unreported income identified by matching documents.
Not All Audits Result in You Owing Additional Taxes
Contrary to popular belief, not all audits result in the taxpayer owing additional taxes. In fact, according to IRS data, roughly 15% of audits result in refunds to the taxpayer, while 21% result in no change.
Audits Don’t Always Spell Trouble
A common misconception is that once you’re audited, you are more likely to be audited again. This is not always true. If your audit results in no change or you receive a refund, it will not necessarily increase your chances of being selected for an audit in the future. Repeat audits usually only happen if the IRS finds significant issues or mistakes in your books.
It’s important to remember that understanding your rights and the reality of IRS audits can minimize any potential stress or fear. If you have questions or need help with any tax-related issues, contact Brightside Tax Relief. Our team of professionals can provide guidance and help you understand the process to put your mind at ease.
In conclusion, IRS audits are a standard, albeit rare, part of the taxpayer’s journey. With a good grasp of common misconceptions and facts – from the reasons and criteria for being audited to the different types of audits – you can prepare and respond appropriately in the unlikely event you are audited. At Brightside Tax Relief, we believe in keeping our clients informed, empowered, and ready to tackle all their tax challenges with confidence.
