The words “tax audit” can strike fear in even the most law-abiding, sturdy individual. The Internal Revenue Service has a reputation for its no-hold barred pursuit of everything it is owed in taxes. However, simply because a person thinks they might have a tax issue does not mean they need to be fearful. Knowing when and why the IRS might conduct an audit is part of crafting a strategy to address the issues and move forward.
Know the basics about an IRS audit
The perception that the IRS will show up in person for an audit is misplaced in most cases. In general, the audit is conducted either through the mail, at the IRS office or at the taxpayer’s business. An audit is simply a closer look at the tax return. The objective is to get everything the IRS believes it is owed, not to arrest people and ruin them financially.
Often, it is done by computer and red flags were the catalyst for the audit. It could be as simple as the taxpayer making a math error, failing to disclose a minor amount of income or overestimating a deduction. Those who do not have a set income on a regular basis are prone to making mistakes.
When there is a lack of consistency in the tax return from one year to the next, that could be called into question. A business that made a certain amount of money one year but made far less the next year with no clear explanation might want to make sure their numbers are accurate. Other issues could be child deductions or the earned income tax credit.
It is not necessarily wealthy people with successful businesses or professional stature who will be the target of an audit. It can happen to anyone. Sometimes, they are done randomly. People who have partners who could have made questionable entries into their tax return could also be questioned. Statistically, the IRS data says that for 2022, they audited just about four returns for every thousand it received. That was a reduction from the prior year.
Since the tax deadline recently passed and the tax returns are still being processed and assessed, this could be a problem for people who will need to get organized for the audit. In some instances, they might need to be legally protected to avoid onerous penalties when they might not be warranted. Tax audits do not immediately mean there are major legal consequences on the horizon, but it is still critical to be shielded for every eventuality.