6 Reasons To Stop Being Afraid of Tax Audits
It’s hard to imagine that anyone wants a do-over with the IRS after they finally finish their taxes, but you shouldn’t live in fear of an audit even if you wouldn’t look forward to one.
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According to a new GoBankingRates study, about one in 10 people worries about being audited more than anything else on Tax Day. People are more likely to stress about audits than identity theft and nearly as likely as they are to worry about having enough money or missing the filing deadline.
Given the absolutely loathsome status of an IRS audit, no one could be blamed for dreading the thought of going through one. An audit notification is always an unwelcome piece of mail, but don’t worry. Your darkest fears are mostly overblown.
You’ll Probably Live Your Whole Life Without an Audit
The No. 1 reason you shouldn’t dwell on audit anxiety is right there in the results of the GOBankingRates study, which polled more than 1,000 respondents. When asked if they had ever been audited, 82% said no.
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“The IRS only audits a small number of returns, so the chances of being selected for an audit are slim,” said Dana Ronald, CEO of the Tax Crisis Institute.
According to Syracuse University’s Transactional Records Access Clearinghouse, the IRS audited about 0.38% of all returns in 2022, down slightly from 0.49% the year before.
Audits Aren’t Indictments or Even Accusations
There’s a common misconception that audits are the IRS’s version of a hot pursuit — that the agency suspects you of wrongdoing and is coming to comb through your records for evidence.
It’s usually not so cops-and-robbers.
“A tax audit is not always an indication of wrongdoing or criminal activity,” said Olivier Wagner, best-selling author and founder of the tax firm 1040 Abroad. “Many audits are conducted simply to ensure that taxpayers are in compliance with tax laws and regulations.”
The agency uses statistical formulas and computer screening models to scan for “norms” against similar returns. The software often identifies easily correctable inconsistencies that deal with the nuts and bolts of tax returns that are otherwise accurate.
“If you are audited,” Ronald said, “it is usually because the IRS has identified something in your return that needs further clarification or verification.”
Audits Present an Opportunity To Learn and Improve
For the optimist within you, consider that you might come out of an audit better than you started if you go into the process with a positive attitude.
“Audits can actually help taxpayers identify errors and inconsistencies in their tax returns, allowing them to correct them and potentially avoid future penalties or interest,” Wagner said. “Additionally, audits can be an opportunity for taxpayers to learn more about tax laws and regulations and improve their future tax filings.”
You Might Even Get Some Good News
The process isn’t as daunting as you might think: There’s no interrogation or even human-to-human interaction in most cases. According to H&R Block, the IRS conducts 70% of its audits by mail and, in most cases, is not after money.
“The majority of tax audits don’t result in additional taxes,” said Zach Larsen, finance expert and founder of Pineapple Money. “In fact, many times taxpayers will receive a refund after an audit.”
TurboTax cited the example of a family learning only through an audit that they were due a refund because they took a hit from a stock sale but didn’t report a capital loss.
You Have the Rights Throughout the Process
If you receive an audit notification, you’re certainly entitled to hope it will lead to a refund. Don’t bank on it, but also don’t panic. If the IRS finds errors that result in you owing money, that’s not the end of it.
“The IRS has safeguards in place to protect taxpayers’ rights during an audit process,” Larsen said. “Taxpayers have the right to representation by a qualified attorney or accountant during an audit and can also request copies of all documents used as evidence against them during the audit process. Additionally, if any penalties are assessed after an audit, taxpayers have the right to appeal these decisions before they become final.”
You’re Not Going to Jail
Everyone knows that Al Capone went to Alcatraz for income tax evasion. The moral of the story isn’t that IRS audits land you in federal prison. The moral of the story is don’t be Al Capone.
The IRS audits only a tiny fraction of the returns it receives; and, of those, it refers an even tinier fraction to the Justice Department for criminal prosecution.
While the IRS can and does impose fines and penalties if it discovers egregious errors or intentional deceit, it does not have the authority to prosecute crimes and resolves virtually all audits outside the criminal justice system.
“People should be aware that any mistakes made on their returns can likely be corrected with updated documentation and a reasonable explanation,” Ronald said. “If you are honest and transparent when dealing with the IRS, there is no need to be afraid.”
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