Common Myths About IRS Audits and the Truth Behind Them
Despite being a common occurrence, there are many misconceptions about what IRS audits are and how they work. Whether you’re a small business owner, freelancer, or a salaried employee, it’s important to have a clear understanding of what to expect from an IRS audit so you can approach it with confidence and be prepared to defend your tax return.
In this article, we’ve compiled a list of the most common misconceptions about IRS audits and provided the truth behind them to help you better understand the process.
What Are the Most Common Myths About IRS Audits?
Myth 1: IRS Audits are Random
The perception that IRS audits are completely random and arbitrary is a common misconception. The truth is that IRS uses a systematic approach in selecting tax returns for audit. The selection process is based on several factors such as income level, inconsistencies in tax returns, and the presence of red flag deductions.
For example, taxpayers with high income levels are more likely to be selected for audit as their returns tend to have more complex financial transactions that require further scrutiny.
Additionally, the IRS may flag tax returns with inconsistencies, such as mismatched information with third-party sources, as a potential sign of tax fraud or errors. Certain deductions, such as home office expenses or high charitable contributions, may also trigger an audit as they are known red flags for the IRS.
Myth 2: Being Audited Means You Did Something Wrong
Another common myth is that being audited means you did something wrong. While it’s true that audits are often triggered by inconsistencies in your tax return, it’s also possible to be selected for an audit even if you did everything right. IRS has to audit a certain percentage of tax returns each year to ensure compliance.
However, the IRS does have a heightened level of scrutiny for certain deductions and tax situations, such as those with high incomes, those who claim business expenses, and those who have offshore bank accounts. In these cases, being selected for an audit does not necessarily mean that you did something illegal, but the IRS may want to verify the accuracy of your tax return.
It’s also worth mentioning that the IRS may choose to audit you if they have received information from a third-party source, such as your employer, that contradicts information on your tax return. This information can lead the IRS to suspect that you underreported your income or improperly claimed deductions.
The most important thing is to remain calm and professional if you are selected for an audit. You should also consider seeking professional help, such as a tax attorney or accountant, to assist you in navigating the audit process. Being audited can be a stressful experience, but by staying organized and having all of your documentation in order, you can ensure the best possible outcome.
Myth 3: IRS Audits are Intimidating and Stressful
It’s understandable to feel intimidated by the thought of an audit. But with proper preparation and the right support, the process can be manageable.
One key aspect of preparing for an audit is to gather all necessary documentation to support your claims, as this will ensure a smooth process. Having a tax professional by your side can also make a big difference.
A tax professional can help to ensure that you have all of the necessary documentation to support your claims and that you are presenting it in a favorable light. By being well-prepared and having a knowledgeable tax professional on your side, the stress and intimidation associated with an IRS audit can be significantly reduced.
Myth 4: You Don’t Need to Hire a Tax Professional for an Audit
While some people believe that they can handle an audit on their own, it’s always a good idea to have a tax professional on your side. Tax professionals have extensive knowledge of the audit process and can help you prepare, respond to questions, negotiate on your behalf, and help you feel more confident and reduce stress.
Talk to a Tax Professional Today
IRS audits can be a confusing and intimidating experience, but it’s important to understand the truth behind common myths. By being informed and prepared, you can reduce stress and ensure a positive outcome. If you receive an audit notice, don’t hesitate to reach out to a tax professional for help.
At Milikowsky Tax Law, we have over a decade of experience working with IRS and tax audits. We’re experts in defending business owners in the face of IRS or other government agency audits.
Interested in learning more? Read on to learn how to respond to an IRS audit.