Tax season is a stressful time of year. Being audited by the Internal Revenue Service could make things a whole lot worse. Who are the lucky people who get chosen for an audit? Here are a few things the IRS looks at when deciding whether or not to audit your tax return.
First, here’s a little background on the process. When you file your tax return, it is compared with the norms for similar returns. These guidelines are constructed from audits of a random sample of returns.
Next, your return is reviewed by an auditor. If the auditor notices any questionable items, he or she will flag the items and then forward the return to an examining group.
Then a manager will review the return.
Depending on the review findings, the return can either be accepted or assigned to another auditor. The auditor looks again for questionable items and then proceeds to either accept the return or schedule an appointment with the taxpayer.
Some things that might deem your tax return “questionable” include:
- Failing to report all your taxable income. Don’t hide income from the IRS. Copies of your W-2s and 1099s are sent to the IRS. Any discrepancies could cause your return to be flagged.
- Making large claims for business expenses. Overstating business expenses could land you in hot water. Make sure you “keep copies of all your receipts, as well as a notation of the dates and times, description of the expense, the business purpose and business relationship,” says H&R Block.
- Submitting an incomplete return. The IRS might become suspicious and look even closer at your return. Make sure everything is complete before you file.
Know that it is unlikely that returns from more than six years ago will be included in an audit (although in some cases, it can happen).
Says the IRS, “Generally, the IRS can include returns filed within the last three years in an audit. Additional years can be added if a substantial error is identified. Generally, if a substantial error is identified, the IRS will not go back more than the last six years.”
For more information, take a look at the IRS video series entitled, Your Guide to an IRS Audit.