What should you do if you are randomly selected for an audit?
The chances of an individual getting audited are slim. Most audits are performed on businesses. That being said, the IRS does randomly audit less than 1% of taxpayers per year. If you make between $25K and $200K, the audit rate is around 0.4%––or about 1 in 250. No matter how slim the odds, it’s better to be safe than sorry!
Step 1 happens before you get audited (or don’t get audited!) Step 1 is happening right now. It’s being very organized and keeping great records of your income, business expenses, and filing your taxes on time. You’re already doing that? Great. On to Step #2.
Step 2 is to verify that you are actually being audited. The IRS won’t call you (except in very rare circumstances, but if it’s gotten that far, you know why they’re calling!) If someone’s on the phone telling you you’re in big trouble with the IRS, and you haven’t ignored letters about years of back taxes… hang up. It’s a common scam.
The IRS will always make first contact with you by mail. If you get a letter from the IRS, don’t panic. It may be a notice that they caught an error in your return and it needs to be adjusted. Sometimes this can even happen in your favor!
If the letter indicates that you are being audited, that doesn’t necessarily mean you’re in trouble, either. In this case, move on to Step #3.
Step 3: Get your records together. The letter you receive will tell you exactly what they need. Here’s a list of all the records the IRS might request. Another thing you might consider is hiring a tax professional to represent you. If you used software such as TurboTax or H&R Block, you may have already paid for audit assistance, so make sure to check before you hire outside help. Here is a more comprehensive list of things to know when preparing for an audit, should you ever get to Step #3.
Step 4: Don’t leave the IRS hanging. Respond to your notices within thirty days to avoid any extra interest being added in the case that you owe additional money. If you need more time, you can usually get a thirty-day extension without much trouble.
At this point, the audit is going to happen. There are three outcomes: no change, agreed, or disagreed. If your audit was random and your tax return was correct to begin with, you will have a “no change” outcome. If the IRS found an issue and you agree to fix it, you’ll have an “agreed” outcome. If you want to dispute the IRS’s proposed changes, then you can file an appeal.
While it may strike fear into your heart to see the dreaded IRS return address in your mailbox, if you’re keeping good records and filing honestly about your income, you have nothing to worry about when it comes to an IRS audit.