What Triggers an Audit From the IRS?

What triggers an audit from the IRS?

By Donald Williams                                                                                                                                                                                    Williams Accounting & Consulting

There are few things more stressful and frustrating than finding out that you are facing a federal tax audit. As unnerving as it can be, it is important to remember that an audit does not mean that you did anything wrong. The Internal Revenue Service (IRS) defines a tax audit as a “review/examination of an organization’s or individual’s accounts and financial information to ensure information is reported correctly.” Here, our Atlanta tax resolution consultants explain the key things to know about what triggers an audit from the IRS.

Know the Two Types of IRS Audits

Not all tax audits are created equal. In fact, the IRS actually conducts two different types of tax audits. You or your business may be subject to either of the following IRS audits:

 

  • Mail Audit: Mail audits are the more simplified and routine type of tax audit. The IRS will generally request additional financial records and direct answers to some specific questions. Some mail audits are routine while others are triggered by (alleged) irregularities.
  • Field Audit: A field audit (office audit) is the more comprehensive type of tax audit. With this type of audit, an agent from the federal tax agency will contact you directly to get information.

 

Seven Common Issues that Could Trigger an IRS Audit

As noted previously, a tax audit does not mean that you did something wrong. These audits are initiated for a wide range of different reasons. In some cases, tax audits are random. In other cases, they are started because of issues with a tax return. Here are seven common issues that could potentially trigger an IRS audit:

 

  1. High income: High earners are more likely to get audited.
  2. Self Employment: Self-employed professionals, including some small business owners, are more likely to face state and federal tax audits.
  3. (Alleged) Failure to Report: The IRS may audit you if they believe that you failed to report or substantially underreported your income. 
  4. Many Deductions: You have a right to take all available tax deductions. Though, a large number of deductions does increase the likelihood of an audit.
  5. Consistent Business Losses: The IRS is more likely to audit a business that reports financial losses—and no tax liability—year after year.
  6. Unusual Investments/Earnings: If you have large gains in cryptocurrency or other unusual investments, you may be more likely to face an audit.
  7. The Constant Use of Round Numbers: You are supposed to report specific, accurate information to the IRS. Round numbers suggest potential issues.

All tax audits need to be taken seriously. Tax issues are a problem that needs to be resolved. If you or your company is facing a mail audit or field audit from the IRS, an experienced tax resolution professional can help you gather and prepare all of the documents and records that you need to protect your financial interests.

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