Paying Taxes 101: What Is an IRS Audit?

It’s something every taxpayer dreads—an IRS audit. Paying taxes is an essential part of living in society, and the IRS, or Internal Revenue Service, oversees federal tax returns, processing, and payments.

We are all required to file taxes each year, which may lead to a tax return or leave us owing tax. If you owe tax, you’ll need to pay the IRS online via Direct Pay, credit card, or a payment plan.

If you’re a taxpayer, you need to understand how audits work. Keep reading to learn more about what an IRS audit is, why they happen, and what you can do if it happens to you.

What Is an IRS Audit?

An audit is when the IRS decides to review the financial information of an individual, organization, or business. Audits can happen to anyone or any business.

Simply, the IRS wants to take a closer look at the taxes of someone to ensure that the correct amount of tax has been paid. Tax evasion is a crime, and the government depends on tax payments to fund several and state programs.

However, in most cases, incorrect tax payments are honest mistakes. If you’re found to have paid taxes incorrectly, you’ll usually be liable to pay the amount owed, but sometimes fines may also be issued.

What Are Common Reasons for Auditing?

There are plenty of reasons why the IRS might select to do an audit. While the IRS can audit for any reason, here are some of the most common ones.

Random Selection

If you’ve been audited, it may just be your lucky (or unlucky) day. The IRS uses high-tech programs to randomly select individuals to screen.

These are often due to statistical abnormalities—if your returns look different than others, it may get selected for audit. In most cases, there would be a legitimate reason for your tax return looking different, so there’s nothing to worry about!

The IRS are just doing their job, as they need to do a number of audits as a method of quality control.

Failing to Report Income

If you haven’t reported all of your income, either on purpose or accidentally, then you’re more likely to be audited. A big reason that the IRS does audits is to uncover missing tax, so if all of your income hasn’t been paid, the IRS will find out.

If you have a part-time side gig or a job that pays only in cash, this still counts as taxable income and will need to be declared.

Freelancing, stock market wins, and even lottery winnings are taxable, so make sure you fully understand the tax laws. Even income from renting your home as an Airbnb or driving with Uber needs to be declared, but ask your accountant if you’re ever unsure of what counts as taxable income.

Or, if you have a business or personal connection to someone else who has been audited for failure to declare, you may be audited due to your relationship with that person.

Mathematical Errors

Another common reason for audits is mathematical errors. Tax can be incredibly complex, and if you make an error when calculating, you can still be held responsible.

The best way to avoid tax errors is to get your taxes done by a pro, rather than trying to figure it out yourself. Working with tax relief consultants can ensure that your taxes are calculated accurately.

It can also help to double-check all of your work, ensuring you haven’t done anything wrong.

Claiming Too Many Deductions

Deductions help us save money on our taxes, but if you’ve claimed too many deductions, this can be a red flag. While deductions are allowed, the IRS wants to make sure that you aren’t taking advantage of them.

The IRS will be checking large charitable donations, ensuring they are accurate. They’ll also be checking home office deductions, checking that all deductions are accurate.

How Far Back Can the IRS Audit?

Generally, the IRS doesn’t go back further than six years. However, most audits occur within the last three years.

For this reason, it’s recommended to hold onto your tax paperwork and financial documents for at least six years, so that you can refer to them if you happen to be audited.

What Should I Do Once I’ve Been Audited?

If you’ve been audited, stay calm! While the process can be stressful, it’s important to remember that it will all probably be over before you know it.

Next, take the time to understand the scope and timeframe of the audit. After reading through it all, take the time to answer all of their questions honestly and completely.

You may need to provide some supporting documentation as well, to verify your statements.

If you disagree with the results of the audit, you’re legally allowed to file an appeal.

You may also want to get expert help when you’re being audited. Working with your accountant or a tax professional can help you navigate the auditing process.

Use These Tips to Better Understand the Audit Process

An IRS audit can happen to anyone, so all taxpayers should be familiar with the auditing process and how it works. Most of us are never likely to be audited, but if you are, you’ll need to understand how it works.

If you get audited, we recommend working with your accountant to complete the audit correctly. That way, the IRS will be satisfied with the results and you can get back to normal life!

Get started today by familiarizing yourself with all tax requirements so that your taxes are filed correctly each year—this will keep the IRS happy and help you avoid audits.

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