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    Prepare for scrutiny: IRS audits may soon become more common

    Prepare for scrutiny: IRS audits may soon become more common

    Financial Planning

    In recent years, the IRS has audited only about 0.5% of individual tax returns. But that’s probably going to change. President Biden and some legislators have pushed for increased IRS funding to help close the tax gap — the difference between what taxpayers owe and what they actually pay. In fact, several federal spending proposals rely on revenue recovered from unpaid taxes to avoid new tax increases.

    It’s still not clear which groups will be targeted. But the IRS has stated that historically, audit risk rises with income and that taxpayers with incomes higher than $10 million are much more likely to be audited than other taxpayers. Regardless of your tax bracket, be prepared to act if you receive a letter from the IRS. Your response may determine whether the process is drawn-out and frustrating or relatively swift and painless.

    Need to know

    The IRS generally contacts taxpayers about an audit via U.S. mail or with a phone call and follow-up letter. Important: The IRS never uses email to notify taxpayers of pending audits. If you do receive an email, it’s likely an attempt to defraud you.

    The upper right corner of the envelope you receive should include a number specifying the reason for the correspondence. For example, Notice Number CP05A indicates that the IRS is examining your return and requires documentation.

    Your return may have been chosen for examination randomly, or because the IRS needs additional information from you. Even if the IRS suspects mistakes or misstatements, you should respond while remaining calm and cooperative.

    Respond appropriately

    Most IRS audit notices include a deadline by which you’re required to respond. With that and the focus of the audit in mind, begin gathering the information you’ll need to respond appropriately. This may include invoices, canceled checks and receipts, as well as your tax return for the year(s) in question. Make duplicates of any documents you’ll need to provide to the IRS, so you don’t hand over your only copy of a record.

    Although it’s critical to provide the information requested, you don’t want to offer additional records, such as tax returns from years falling outside the audit’s scope. Doing so may prompt more questions and a more extensive audit.

    If a tax preparer helped with your return, contact that person. Your tax professional will likely know what information should be provided and how to answer questions appropriately, without inviting further investigation. The advisor also can review any documents you’re asked to sign — before you put pen to paper. This can be valuable whether you’re responding in person or via letter. Finally, having an expert on your side can limit the time and stress of the audit. 

    Owing — or not owing — money

    Most taxpayers being audited assume that the process will end with them owing money. In fact, audits often conclude with an individual’s tax liability remaining the same. And in some cases, the IRS ends its examination concluding that it owes money to the taxpayer, plus interest. But if you do end up owing back taxes, how much should you expect to pay? The answer varies widely. Keep in mind that, in addition to the amount owed, you’ll be assessed interest and, potentially, penalties.

    Although most audited taxpayers agree to any changes proposed by the IRS, you can appeal the decision through the IRS’s Appeals Office. Or you can take your case to court. IRS Publication 5, Your Appeal Rights and How To Prepare a Protest If You Disagree, explains your rights to appeal and the proper procedures to do so.

    Best case scenarios

    Of course, most audits don’t end up in court. Many, indeed, are correspondence audits in which you mail requested documents back to the IRS and respond to any follow-up questions.