Nobody enjoys a tax audit, but should you fear receiving one? Generally, the answer is no.
According to the 2017 IRS data book, the agency audited nearly 934,000 tax returns during the 2017 fiscal year — only 0.6 percent of the total individual returns. That's the lowest individual audit percentage since 2002.
If audited business returns are included to raise the total to 1.1 million examined returns, the percentage drops even further to only half of a percent.
Even though the odds of being audited are low, a recent survey from Lexington Law shows that 25 percent of taxpayers still fear being audited. Other survey results suggest that myths may be contributing to these fears.
Lexington Law found that men were 12 percent more afraid of receiving an IRS audit than women, with older men being more afraid. Perhaps that's because Baby Boomers grew up in an age with higher audit rates and higher tax rates.
Insufficient preparation was another fear factor. How confident are you that you have the necessary information to withstand an audit?
Fear could be driven by poor recordkeeping. Men aged 55 and above are 32 percent more likely than women to throw away their tax records less than three years after filing — the typical length of time IRS audits will go back to. Conversely, women of the same age are one-third more likely to save tax records anywhere from four to eleven years after filing.
Taxpayers facing audits shouldn't assume the worst. Correspondence audits accounted for just over 70 percent of the 2017 audits. Less than 30 percent of audits were the traditional face-to-face field audits that most taxpayers equate with audits — and fear the most.
Audits don't always have negative or neutral outcomes. You can come out ahead. For the returns reviewed in fiscal 2017, over 24,000 taxpayers disagreed with the IRS auditors' findings, resulting in almost $11.5 billion in extra taxes, but almost 34,000 taxpayers received additional refunds totaling over $6 billion.
You could be randomly chosen for an audit, but with their limited budget and resources, the IRS is far more interested in returns that raise some sort of red flag. You can reduce your audit odds by thoroughly checking your return for errors that could raise concerns, like significant math errors or 1099/W-2 forms that don't match up with reported income.
It's also wise to check your credit report and Social Security records for signs of identity theft. Fraudulent work records or tax documents in your name increase the odds of IRS scrutiny — adding to the woes of a stolen identity.
You may be flagged for other reasons that are legitimate but invite scrutiny, such as having a greater amount of deductions than the average taxpayer, having foreign assets, or simply being in a higher tax bracket. Lower income taxpayers may be in for greater scrutiny if they take the Earned Income Tax Credit or other refundable tax credits that are frequently exploited by criminals.
Eric Bronnenkant, Certified Financial Planner and Betterment Head of Tax, gives succinct advice for fearful taxpayers, suggesting that people prepare taxes "honestly and truthfully, and also be able to support what they put on their return in the event they get audited." Good recordkeeping is essential.
We suggest keeping all tax records organized and in a safe place indefinitely (three years at the very least). The odds are that you'll never be audited and have to look beyond the previous year's tax return, but why not establish peace of mind by having your documents in order? Don't worry, be prepared.
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