Nobody likes to be audited – being audited by the IRS is one of the things Americans fear the most. We do everything possible to prevent an audit by the IRS.
Indeed, most people worry deeply about getting audited, just like everybody else.
But this is not something you should worry about so much. Let’s understand why?
Most audits are unlikely to happen. In reality, only 0.86% of all tax returns in the United States get audited, which means less than 1 out of hundred tax payers get audited! This is a minuscule number.
An audit is said to happen if the IRS records don’t match the amount of income claimed by you. There are also a number of tax deductions that you claim for that may result in an audit, such as a home office deduction or wrongly claiming the business use of a vehicle.
Some income brackets get audited more often than others. For example, people who earn over $10 million a year are more likely to get audited. High income tax payers have a higher audit rate compared to low income tax payers.
The IRS considers the tax liability of the taxpayer before auditing them. They have limited number staff working for them, and limited resources, so you can be sure that the IRS is very selective about who they choose to audit or not.
Tax returns that report no adjusted gross income, are audited as well, especially those who say that they have no income because of a business loss. Indeed, 5.3% of those with no-income returns were audited during the year 2014.
The audit rate for those in the middle-income bracket is very low. Only 0.56% of taxpayers who earned between $25,000 and $199,999 were audited last year.
The point to be made is, unless the IRS smells something really fishy or if you happen to be in the top 1% of the tax returns, you are not likely to be audited.
What if you were to get audited?
Even if you were to get audited by the IRS, this is not an outcome you should fear unnecessarily, unless you have something to hide. The IRS has three types of audits – mail audit, field audit and office audit.
If it is a mail audit, the IRS just sends you a letter asking for some documentation. You can just send them what they are asking for and your problem is solved. Mail audit is not really a big deal and it takes only a few minutes of your time.
The other types of tax audits such as office audits and field audits are slightly more complicated. In an office audit, the IRS will visit your office and access your books, receipts or invoices.
A field audit means the IRS visits your house to check for a home office deduction that you have applied for. They want to verify that the information is true and accurate. So as long as you have not misrepresented anything in your tax return, you have no reason to fear an IRS audit.