Audits: how to keep tax breaks without sacrificing peace of mind
Last year, the IRS audited more than 1.3 million taxpayers and assessed $33 billion in taxes. Taxpayers who fear an IRS audit may hesitate to claim all the tax breaks to which they are entitled. Rather than risk an audit, these taxpayers might prefer to “play it safe” and leave those tax breaks – their money – on the table.
It’s easy to understand this fear. The IRS audits all types of taxpayers at a range of income levels. Of the more than 1.3 million audits in 2014, two of three involved taxpayers who made $50,000 or less per year.
In the face of these IRS audits, how can taxpayers keep their tax breaks without sacrificing their peace of mind?
First, taxpayers should report all their income. The surest way to get a letter from the IRS is to leave any amount of income off their return. The IRS can easily check income reported on tax returns against what employers, banks, brokers and more report.
Second, taxpayers should carefully document their expenses and eligibility for any tax credits or deductions they take. The IRS compares deductions taken by taxpayers in the same income bracket to find inconsistencies including mileage and charitable donations. Taxpayers who made large donations, particularly non-cash donations like clothing, household supplies or even vehicles, may have additional record-keeping requirements to substantiate those deductions.
Finally, taxpayers should know when and where to get help when they need it. Taxpayers may need the help of a professional tax preparer at different times, depending on the taxpayers’ situation and comfort level. Some taxpayers may need help understanding whether they are eligible for a certain tax benefit, while others will need help knowing which documents and receipts they need to back up their tax return. Others might feel like they can prepare and file their taxes on their own, but may want help when it comes to navigating an IRS audit.
The IRS conducts audits year round and will typically contact taxpayers selected for audit within a year. However, the IRS may contact a taxpayer as late as three years after the filing date.
Taxpayers who get an audit notice in the mail should respond immediately, because delays could result in additional penalties and fees. The IRS conducts most audits by mail and resolving the issue may be as simple as sending back supporting documents. If a face-to-face meeting with the IRS becomes necessary, some taxpayers may choose to have their tax professional represent them. Taxpayers who disagree with the auditor’s findings can appeal the results.
The fear of an audit and the risk it presents – lost money and time – shouldn’t prevent a taxpayer from claiming tax breaks they’re eligible for. Instead, taxpayers should take some straightforward precautions to avoid an audit if possible or be prepared in case of an audit. These precautions will give taxpayers what they need for a successful resolution, without sacrificing their tax benefits or their peace of mind.