“Audit” is a word that can strike fear into the hearts of taxpayers. In reality, the chances of an Internal Revenue Service audit aren’t that high. In 2017, the most recent statistics available, the I.R.S. audited 0.5% of all individual tax returns.
Being audited does not necessarily imply that the I.R.S. suspects wrongdoing. The I.R.S. says that an audit is just a formal review of a tax return to ensure information is being reported according to current tax law and to verify that the information itself is accurate.
The I.R.S. selects returns for audit using three main methods.
Random Selection. Some returns are chosen at random based on the results of a statistical formula.
Information Matching. The I.R.S. compares reports from payers – including W-2 forms from employers, 1099 forms from banks and brokerages, and others – to the returns filed by taxpayers. Those that don’t match may be examined further.
Related Examinations. Some returns are selected for an audit because they involve issues or transactions with other taxpayers whose returns have been selected for examination.
There are a number of sound tax practices that may reduce the chances of an audit.
Provide Complete Information. Among the most commonly overlooked information is missing Social Security numbers – including those for any dependent children and ex-spouses.
Avoid Math Errors. When the I.R.S. receives a return that contains math errors, it assesses the error and sends a notice.
Match Your Statements. The numbers on any W-2 and 1099 forms must match the returns to which they are tied. Those that don’t match may be flagged for an audit.
Don’t Repeat Mistakes. The I.R.S. remembers those returns it has audited. It may check to make sure past errors aren’t repeated.
Keep Complete Records. While it won’t reduce the chance of an audit, it may make it much easier to comply with I.R.S. requests for documentation.
When it comes to taxes and tax return preparation, our philosophy is simple: follow the rules and do the right thing. We make sure our clients maintain proper documentation, pay attention to details, and have good advice from qualified professionals.
Andrea L. Blackwelder, CFP®, ChFC, CDFA® and Joseph D. Clemens, CFP®, EA are the founders and partners of Wisdom Wealth Strategies. Their shared passion is simple: to bring financial empowerment, understanding, and peace-of mind to people who wish to improve their financial future, build wealth for their families, and achieve financial independence. Click here to find out more about how you can work with the Denver Financial Advisors at Wisdom Wealth Strategies.