Even the most law-abiding citizens fear tax audits. Luckily, your chances of being audited are very low. Only 0.8 percent of all individual tax returns were audited for the 2014 tax year. However, it is still important to understand the guidelines for federal audits, how to prevent an audit, and what to do if you are audited.
A federal tax audit is an examination of your tax return. Audits seek to verify that all income was accurately reported and that the IRS received the proper amount. Returns that differ drastically from the norm are more likely to be selected for audits.
According to Fox Business, income is a large factor in the audit selection process. If you have a very high or low income, compared to the average household, you are more likely to be selected. Higher income equates to more taxes; if there are any inaccuracies on your return, the IRS may be able to collect more money. On the other hand, if your income is lower than the average, with suspicious deductions, the IRS may believe that you omitted taxable income.
Turbo Tax also warns that other factors will make you a more likely candidate for a tax audit. The IRS looks for errors, so any unreported income will be a large red flag. Additionally, there are strict rules regulating foreign bank accounts, so if you bank overseas, be sure to comply with the Foreign Account Tax Compliance Act. Finally, excessive business tax deductions are regarded with suspicion.
The IRS has a three-year statute of limitations on tax audits. However, this can extend to six years with certain exceptions: if over a quarter of your income was omitted, for instance. Additionally, if you never filed a return or left out certain forms, there is no time limit for tax audits.
If you are selected, you should comply with all instructions. There are four main types of audits:
Correspondence and random audits are deemed less serious and can often be resolved by following the instructions you receive. Office and field audits are considered more serious. You may choose to have a tax professional represent you. Tax relief companies such as Tax Defense Network can help you throughout the entire audit process. Look for companies that employ enrolled agents, certified public accountants, and lawyers. Many companies, including Community Tax and Optima Tax Relief, specifically advertise audit representation. If you are audited, you do not have to go through it alone. Compare top ranked tax relief companies here.