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IRS Audits: What You Need to Know

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What we’ll cover:

IRS audits are the proverbial monster under the bed for some adults. Based on the 2018 Comprehensive Taxpayer Attitude Survey from the IRS, the fear of an audit was one of the top three factors that influenced taxpayers when it comes to reporting and paying taxes honestly. 

The dread is understandable considering how television shows, movies and the media sometimes depict audits like criminal investigations. Not to mention, it seems that whenever a well-known public figure gets tangled up with the IRS, it rarely ends well. 

But what is an IRS audit and is it something that should keep you up at night? 

Think of it as a more formal review or examination of your return, where the IRS is double-checking your work.

IRS audits are not as scary as you might think

“Selection for an audit does not always suggest there’s a problem,” the IRS says on its website. 

In other words, the IRS isn’t necessarily accusing you of having done something wrong. Nor does it mean the IRS is out to get you. 

If you’ve been selected for an audit, it simply means that the IRS wants to take a closer look at your tax return(s) and financial information to make sure you’ve reported everything completely and correctly as required by law. 

Think of it as a more formal review or examination of your return, where the IRS is double-checking your work. Did you report all sources of income? Are you actually eligible to claim the deductions or credits on your return? Did you pay the correct amount of taxes? You get the idea.

So if you filed your return truthfully, paid your taxes correctly and kept good records, you shouldn’t have anything to worry about. 

The chances of being audited by the IRS are low

The IRS audited approximately 1 million tax returns filed in 2017, according to the agency’s data. That might sound like a lot. But let’s put that figure into context. The IRS received approximately 196 million returns in 2017. So that means only about 0.5% of the total returns were audited. That’s pretty low!

What’s more, not every audit resulted in cutting a check to the IRS. After it was all said and done, the IRS ended up refunding more than $6 million to taxpayers.  

See, that’s not too scary, right?

If you’re selected for an audit, the IRS will first notify you by mail.

How does the IRS decide which returns to audit?

If you still think the IRS is out to get you, it might help to understand how the IRS flags returns for audits:  

  • Random selection: The IRS uses a statistical formula to screen and select returns for audits. If something is out of the “norm,” the return would be tagged for review by an auditor. For instance, if they see some questionable expenses or notice any inconsistencies (e.g., if your reported income is significantly different from the W-2s or 1099s the IRS has on file), that’s when they may flag the return for an official audit.  
  • Related examination: The IRS could also flag you for audit if your tax return is connected with issues or transactions of other taxpayers who the agency is giving a closer look. This sounds a little vague, we know. But the IRS gives the example of any related business partners or investors, whose returns were selected for an audit.

The government won’t come kicking down your door 

If you’re selected for an audit, the IRS will first notify you by mail. This is important: The IRS does not initiate contact with taxpayers by email, text messages or telephone, requesting personal or financial information. And they definitely won’t be sliding into your DMs. 

IRS audits are conducted in one of two ways:

  • By mail (known as a “correspondence audit”)
  • In-person (known as an “office” or “field audit”)  

Of the 1 million returns that were audited in 2017, 74.8% were done by mail and 25.2% were done in person.

What happens if you’ve been selected for an audit?

The initial notification letter from the IRS will let you know if the audit will be done by mail or an in-person interview. The letter will also provide relevant contact information as well as a list of documents the IRS wants to review. 

Keep in mind that the IRS can ask to examine returns filed in the past three years. According to the IRS, audits typically cover returns filed within the last two years. That said, there are circumstances when they can reach back even further – especially, if there are substantial errors in your return(s). 

Some of the documents that the IRS might ask to review, for example, are receipts, loan agreements, employment documents (e.g., W-2s, 1099s, etc.) and bank statements. This is when good tax recordkeeping can save you from a lot of headaches. 

If you do have trouble finding the documents you need, however, you may request an extension. Generally, the IRS can give you an extra 30 days, but this is not a guarantee. Check the IRS website for more information on extension requests.  

How long does an audit take?

Whether or not you need to clear your calendar for an audit depends on a number of factors, including the complexity of the audit, how long it takes you to provide the requested documents, and whether you plan to challenge the IRS findings. 

What are the possible outcomes of an audit?

An audit can have three outcomes:

  • No change: The IRS finds everything to be in order, and the audit results in no changes to your return. 
  • Agreed: This is where you agree with the IRS findings and accept their proposed changes. You could owe additional taxes or you could receive a refund (yay!). 
  • Disagreed: This is where you disagree with the audit findings and any proposed changes to your return.  

Say what? You can disagree with and challenge the IRS?

Hey, it’s America! If you disagree with the audit findings and proposed actions by the IRS, you may request a meeting with an IRS manager. The IRS could offer mediation (known as Alternative Dispute Resolution) to help resolve disagreements. You may also be able to file an appeal.

If you do decide to challenge the IRS findings, know that as a taxpayer, you are entitled to certain rights. These include a right to . . .

  • Professional and courteous treatment by IRS employees
  • Privacy and confidentiality about tax matters
  • Know why the IRS is asking for information, how the IRS will use it and what will happen if the requested information is not provided
  • Representation, by oneself or an authorized representative
  • Appeal disagreements, both within the IRS and before the courts
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This article is for informational purposes only and is not a substitute for individualized professional advice. Individuals should consult their own tax advisor for matters specific to their own taxes and nothing communicated to you herein should be considered tax advice. This article was prepared by and approved by Marcus by Goldman Sachs, but does not reflect the institutional opinions of Goldman Sachs Bank USA, Goldman Sachs Group, Inc. or any of their affiliates, subsidiaries or division. Goldman Sachs Bank USA does not provide any financial, economic, legal, accounting, tax or other recommendation in this article. Information and opinions expressed in this article are as of the date of this material only and subject to change without notice.  Information contained in this article does not constitute the provision of investment advice by Goldman Sachs Bank USA or any its affiliates. Neither Goldman Sachs Bank USA nor any of its affiliates makes any representations or warranties, express or implied, as to the accuracy or completeness of the statements or any information contained in this document and any liability therefore is expressly disclaimed.