The end of the year is approaching, which means tax season is also on the horizon. As taxpayers make end-of-year tax preparations, they may find themselves questioning the audit process. What leads to an audit? Why do some tax filings move forward without question, while others are set aside and receive additional scrutiny?
Having a basic understanding of the process can help taxpayers have the information they need to reduce their risk of a federal tax audit. As you review the following, first ask yourself whether you think the statement is a myth or fact when it comes to audits then read on to find the answer.
- Deductions matter. Fact. The Internal Revenue Service (IRS) uses software with a complicated algorithm to review tax returns. One of the main things this algorithm is searching for is a mismatch between deductions and reported income. If the IRS deems the deductions are too high to fit with the taxpayer’s reported income, it will flag the filing for additional review.
- The IRS does not have a good grasp on taxpayer’s income. Myth. The IRS will carefully review income. It receives documentation from various sources that result in an accurate picture of the taxpayer’s income. If the IRS determines the taxpayer failed to to report income, particularly foreign assets, the agency is more likely to conduct an audit.
- Early tax filings are more likely to get audited. Myth. The IRS has utilized many technological advances, including software that can review returns and help highlight which filings require additional review. All returns filed with the IRS undergo this review, regardless of when they are sent.
- Business owners are more likely to get audited. Fact. Business owners are at an increased risk for an audit, often because they can take a variety of tax deductions. A failure to use these deductions wisely can trigger further scrutiny.
Even with this information, the IRS may flag your returns for an audit. In these instances, it is wise to seek legal counsel to better ensure your legal rights are protected. The attorneys at Goldburd McCone are familiar with the tactics used by federal agents during a tax audit and will advocate for your interests throughout the process.