Have you received notice of an IRS examination of your tax returns? While few taxpayers ever get audited by the tax agency, the experience can be very stressful to those who are. You may wonder how you triggered an audit or what you’ve done wrong to cause this to happen.
The truth is that many audits should not be taken as a personal affront to your honesty, your record-keeping, or your math. These types of audits are often triggered by a few key actions that may not even have anything to do with you. Here are four of the most common scenarios that may be out of your control.
1. Random Selection
Believe it or not, the IRS does simply select a few returns basically at random each year. Your return may simply have been chosen by a statistical formula that has nothing to do with what you have reported. In recent times, this selection has often drawn from a pool of returns that are determined to have a higher chance of misuse through computer modeling.
If you were selected at random, you are not being targeted for anything in particular but are simply part of the overall system.
2. Related Audits
Sometimes, your return may have become entangled with another taxpayer that is being examined. If your employer, for instance, is suspected to have misclassified employees as independent contractors, the IRS may seek information from those who received either Form W-2 or Form 1099 from them. In this case, your cooperation with an examination could be beneficial to you if you have also been misclassified.
3. Records Mismatch
Today’s tax returns are subject to a great deal of computer processing. Computers now handle many activities that increase the accuracy of tax returns. They verify math on the forms, for instance. Databases also match names and Social Security numbers to prevent fraud.
Computers also receive information on all Forms W-2, Forms 1099, and other informational returns in order to match their information with what is reported on returns.
All this automated work means that if certain numbers don’t quite match up, you may get a notice from the IRS. If your employer, for instance, has accidentally issued an incorrect or duplicated W-2 form, your notice may indicate that you haven’t reported all your wages — even though you have.
While a notice that involves an error like this may look worrisome, a tax professional can help you identify what the real problem is and provide documentation to support your correct reporting.
4. Abused Categories
Most taxpayers are aware that there are a few red flags that may cause the IRS to look harder at certain categories of returns. One of the most common of these categories is sole proprietors and others who file Schedule C to report business income and expenses. This form can be used by unscrupulous taxpayers to misreport their earnings and reduce tax liabilities, so it tends to see higher rates of audit.
Additionally, if you fall into one of the common trigger categories — such as having a sudden rise in income or large deductions — you shouldn’t worry needlessly. This type of audit is generally routine and may even be handled without an in-person visit.
While you may not know the specific reason that your return was chosen for examination, the knowledge that the audit may not reflect any suspicions about you can help you address the situation calmly.
At Wiesner & Frackowiak, LC, we aid taxpayers of all types as they handle IRS audits that stem from a variety of causes. Call today to make an appointment and learn how you can resolve your examination in the most positive and painless way.