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Watching For Potential Audit Triggers And How To Address Audit Notices

Now that the April 15th filing deadline is behind us and your tax return has been completed and filed, you may feel relief.  While those who follow the tax guidelines and filing instructions to the letter when completing their return themselves or having their tax professional do so for them are generally safe, this isn’t always the case.  Unfortunately, even accurate returns may sometimes be subject to an IRS audit. 

The good news is that chances are slim that an IRS audit will actually come to pass. Only a small percentage of returns go through the full audit process. Still, you’re better off informed than taken completely by surprise should your number come up.

Audit Red Flags

A variety of red flags can trigger an audit. Your return may be selected because the IRS received information from a third party — say, the W-2 submitted by your employer — that differs from the information reported on your return. This is often the employer’s mistake or occurs following a merger or acquisition.

In addition, the IRS scores all returns through its Discriminant Inventory Function System (DIF). A higher DIF score may increase your audit chances. While the formula for determining a DIF score is a well-guarded IRS secret, it’s generally understood that certain things may increase the likelihood of an audit, such as:

  • Running a traditionally cash-oriented business,
  • Having a relatively high Adjusted Gross Income (AGI),
  • Using valid but complex tax shelters, or
  • Claiming certain tax breaks, such as the home office deduction.

However, no single item will cause an audit. And, as mentioned, a relatively low percentage of returns are examined. This is particularly true as the IRS grapples with its own budget issues.

Even if everything has been completed correctly, you may also fall prey to the luck of the draw as some returns are randomly chosen as part of the IRS’s National Research Program. Through this program, the agency studies returns to improve and update its audit selection techniques.

What To Do If You Receive An Audit Notice

If you receive an audit notice, the first rule is: Don’t panic! Most are correspondence audits completed via mail. The IRS may ask for documentation on, for instance, your income or your purchase or sale of a piece of real estate.

Read the notice through carefully. The pages should indicate the items to be examined, as well as a deadline for responding. A timely response is important because it conveys that you’re organized and, thus, less likely to overlook important details. It also indicates that you didn’t need to spend extra time pulling together a story.

The best course of action to take when you receive the IRS notice is to contact your Untracht Early professional.  We will review the notice in relation to your return and  fully explain what the agency is looking for and guide you on the preparation of your response. If the IRS requests an in-person interview regarding the audit, our experienced tax controversy professionals are available to accompany you — or even appear in your place if you provide authorization.

For more information on audit triggers and IRS audit notices, please contact your Untracht Early advisor.

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