Does the fear of an IRS agent contacting you about an audit send shivers down your spine and influence how you file your taxes? 

You’re certainly not alone. The fear of an audit, with its perceived avalanche of paperwork and potential financial penalties, isn’t uncommon. In fact, studies show a significant portion of taxpayers let this apprehension influence their filing habits. But what if we told you much of that fear is rooted in myth and misinformation?

While facing IRS tax audits can be unnerving, the reality is often far less dramatic than the myths and misconceptions swirling around it. In fact, according to a recent study by the National Taxpayer Advocate, less than 1% of individual returns are selected for audit each year. IRS tax audits might trigger worry, but understanding the process can transform fear into informed peace of mind. So, let’s debunk some common IRS tax audit myths and equip you with the knowledge to approach any potential audit with confidence, not fear.

The fear of an audit can be overwhelming, leaving even the most organized taxpayer feeling lost and confused. At Yari Solutions, we have supported clients through audits by having the needed documentation readily available. This type of audit would be done through email, generally called a correspondence audit.

By familiarizing yourself with the truth of common audit triggers and understanding your rights, you can turn nervousness into an opportunity to address any potential issues before they snowball. Remember, audits aren’t always negative; sometimes they even lead to favorable adjustments. In the end, knowledge and preparation are your most valuable tools. 

How many people actually get audited? 

The truth is, the chances of facing one are far lower than you might think. According to the IRS itself, the chance of an individual tax return being audited in 2023 was a mere 0.6%. That’s right, less than 1% of taxpayers undergo the process. Even higher-income taxpayers aren’t targeted nearly as much as myth suggests, with the audit rate falling for all income groups since 2010. 

It’s worth noting that audits can still occur, but their frequency is vastly overstated. Instead of letting anxiety cloud your judgment, remember these studies and focus on accurate reporting, organized tax records, and understanding your rights.

Why might you be audited? 

While the chances of IRS tax audits are relatively low, understanding why specific returns get flagged can empower you to file with confidence. While random selection exists, the IRS primarily uses risk-based factors to choose returns for examination. These factors typically fall into three categories: income and deductions, math errors, and inconsistencies.

High-income earners, large deductions, and self-employment (business owners) income can raise red flags, as the IRS may want to verify their accuracy. Unreported income of any kind, from gig work to cash payments, is a major trigger. Math errors, even seemingly minor ones, can signal carelessness or deliberate misreporting. Finally, inconsistencies between your return and third-party information (like income reported by employers or banks) can prompt further investigation. 

It’s important to mention that in most cases, you can only be audited for 3 years prior to the time you get an audit notice. There is the occasional exception that the IRS has 6 years to audit your return if they believe you significantly under-reported your income (by more than 25%).

 

Myth Busting:

 

Myth 1: Only wealthy people get audited. 

It’s true that higher-income taxpayers do face a higher audit rate compared to lower-income brackets. According to the IRS’s data, in 2023, the audit rate for individual returns with total positive income (TPI) of $10 million or more was a whopping 8%, compared to just 0.6% for those with TPI below $25,000.

Audit Rates Based on Income (2023)

Total Positive Income Audit Rate
Below $25,000 0.6%
$25,000 – $50,000 0.6%
$50,000 – $100,000 0.5%
$100,000 – $200,000 0.9%
$200,000 – $500,000 1.1%
$500,000 – $1 million 0.6%
$1 million – $5 million 1.3%
$5 million – $10 million 2.4%
$10 million or more 8.0%

 

However, it’s crucial to remember that random selection and computer screening, as well as “red flags” in tax returns also play a significant role in choosing returns for audits. 

 

Myth 2: Filing an Extension Automatically Puts You on the Audit List

Filing for an extension to submit your tax return isn’t an instant ticket to IRS tax audits. This common misconception can cause unnecessary stress, potentially leading to rushed and inaccurate filing just to meet the original deadline. Here’s the reality: Filing an extension simply grants you more time to file your return, and the IRS itself states that extensions do not trigger audits.

While filing an extension itself doesn’t increase your audit risk, remember that the additional time may not solve underlying issues that could trigger an audit. So, if you need an extension, use it wisely to meticulously review your return for accuracy and completeness, addressing any potential “red flags” before submitting. Don’t let the myth of increased audit risk prevent you from utilizing the extension option responsibly when needed.

 

Myth 3: An Audit Means Automatic Seizure and Financial Ruin

The image of IRS agents confiscating your belongings at the first sign of an audit is Hollywood drama. In reality, audits are primarily about verifying the accuracy of your tax return, not ransacking your life. The IRS simply wants to ensure you’ve reported your income and paid the correct taxes.

Here’s a breakdown of potential audit outcomes:

  • No change: If everything checks out, you’ll receive a notification confirming no changes are needed.
  • Agreed adjustments: If discrepancies are found, you may agree to adjustments like additional taxes or reduced tax refunds.
  • Disagreed adjustments: If you disagree with proposed changes, you have the right to appeal through various channels.

While fines and severe penalties can exist for major discrepancies or intentional underpayment, seizures are a last resort reserved for extreme cases involving deliberate tax fraud or significant unpaid taxes. The IRS prioritizes resolving issues collaboratively and offers flexible payment plans if needed.

Remember that communication is key. Actively engage with the IRS throughout the process, provide requested documentation, and seek professional help if needed. By understanding the purpose of audits and potential outcomes, you can replace fear with informed action and navigate the process with confidence.

 

Myth 4: You can’t fight the IRS, so just pay whatever they say.

Don’t let fear and misinformation silence your voice. Facing IRS tax audits doesn’t mean you’re automatically guilty or powerless. You have extensive taxpayer rights enshrined in law, ensuring fair treatment and the chance to challenge proposed adjustments.

Here’s a rundown of your key rights:

  • Right to representation: You have the right to be represented by a qualified tax professional or tax attorney throughout the audit process.
  • Right to explanation: The IRS must clearly explain why you’re being audited and the specific issues in question.
  • Right to appeal: If you disagree with proposed adjustments, you can formally appeal through several channels, including an independent appeals office.
  • Right to confidentiality: Your personal information must be kept confidential by the IRS, with exceptions for specific legal situations.

Communication is crucial. Actively engage with the IRS, ask questions, and express your concerns. If you disagree with their findings, don’t hesitate to initiate the appeal process. You have a voice, and the IRS is obligated to respect it.

 

Myth 5: Only Fancy Lawyers Can Handle Audits

While complex audits requiring intricate legal maneuvers might benefit from a tax attorney’s expertise, the truth is that many taxpayers don’t need to break the bank on high-priced legal representation. The good news? Finance and record keeping experts like myself, or experienced tax professionals with specialized audit knowledge, can be your strategic allies at a fraction of the cost. 

We offer:

  • A personable approach: We prioritize clear communication and personalized attention based on your specific needs.
  • Streamlined expertise: We handle timely communication with your tax preparer or enrolled agent and the IRS or state agencies as needed, freeing you to focus on your daily life.

 

Myth 6: Every Mistake Means Trouble

Take a deep breath. Not every mistake on your return automatically triggers an audit or financial penalty. It’s important to differentiate between common, easily fixable errors and red flags requiring professional attention.

Common, fixable errors:

  • Simple math errors: Typos or miscalculations in deductions or income amounts can be easily rectified upon discovery. 
  • Missing information: Forgetting to include minor supporting documents, like receipts for charitable donations, doesn’t necessarily signal trouble.
  • Minor inconsistencies: Slight discrepancies between your return and third-party reports can often be clarified by providing additional information.

Red flags requiring professional attention:

  • Intentional under reporting of income: Deliberately omitting income sources, even seemingly small amounts, raises serious red flags.
  • Inaccurate claiming of deductions: Inflating deductions or claiming ineligible ones can trigger scrutiny and potential penalties.
  • Complex business income or self-employment: Navigating these scenarios can be tricky, and professional guidance is often recommended.

Remember, the key is transparency and proactiveness:

  • Review your return carefully for any mistakes before submitting.
  • If you discover errors, file amended returns promptly.
  • When facing complex issues or red flags, seek professional guidance from experienced tax professionals.

At Yari Solutions, we scrub your tax data and conduct double-checks before finalizing the financials that will go to your tax expert or enrolled agent. We also assist many clients in double-checking the accuracy of their drafted tax return before the tax preparer submits it. Having two sets of eyes is invaluable and can save you lots of headaches and unnecessary fees or severe penalties. Our proactive approach shields you from the stress of minor errors and ensures your peace of mind.

 

Myth 7: Appealing an Audit is a Lost Cause

Facing IRS tax audits can be overwhelming, and the thought of appealing might seem daunting. But before you throw in the towel, remember that you have the right to appeal. The IRS itself encourages fair resolution and provides various channels for you to challenge their findings.

However, navigating the appeals process effectively requires both strategic knowledge and assertive representation.

 

Myth 8: Amending your return triggers an audit.

Ever realized you made a mistake on your tax return after hitting submit? To amend your return means to file a corrected version of your previously submitted tax return. This is done to report changes to your gross income, deductions, credits, or other information that you initially reported incorrectly. Contrary to popular belief, simply filing an amended return doesn’t automatically land you on the audit list. Amending your return is simply about ensuring accuracy and rectifying an error, not an audit trigger. Be thorough, file correctly, and rest assured the IRS will simply review the updated information and adjust your taxes accordingly.

 

Myth 9: You can’t claim deductions during an audit. 

Facing an audit might raise concerns about losing out on your hard-earned deductions, especially for home office deductions. However, just because you’re under scrutiny doesn’t mean all deductions are off-limits. The key takeaway? Legitimate deductions are still very much on the table but be prepared to back them up with documentation.

The IRS focuses on verifying accuracy, not eliminating your rights. As long as your deductions are legitimate, properly calculated, and supported by documentation, you can confidently claim them during an audit. During the audit, clearly explain your deductions and provide the requested documentation promptly. 

 

Myth 10: You have to answer every question during an audit, even if it incriminates you. 

In severe (and rare) cases, facing an audit can feel like an interrogation, but remember, you’re not obligated to answer every question or incriminate yourself. While open communication is important, you have extensive taxpayer rights protecting your privacy and freedom during the process.

  • You have the right to remain silent. You can decline to answer any question you feel uncomfortable with, and you have the right to consult with a tax attorney or tax expert before responding. Having a qualified professional by your side ensures your rights are protected and can navigate complex questions strategically.
  • Know what you’re signing. Never sign any document without fully understanding its implications. Ask questions, seek clarification, and don’t feel pressured into signing anything you’re unsure about.

The IRS is obligated to inform you of your rights at the beginning of the audit. Understanding your rights empowers you to approach the audit confidently.

Conclusion

Debunk the myths! Understand that most audits aren’t random attacks, they focus on red flags like inconsistencies, large deductions, or unreported income. Audits are not about punishment, but about ensuring accuracy and fairness in tax collection. By equipping yourself with knowledge, understanding your rights, and taking proactive steps, you can transform the audit experience from fear-inducing to manageable. 

How I Can Help

We offer a range of services designed to support you from accurate bookkeeping and accounting to ensuring a seamless and successful tax filing process with your tax preparer or enrolled agent. Schedule a consultation today to discuss your situation and explore potential solutions.

 

Resources:

irs.gov

yari.solutions