Telling people not to panic at the threat of an IRS audit is like telling a Kardashian to avoid self-promotion. It’s an impossible dream. Now the powers-that-be are saying the chances of an audit (even though they’re already pretty small) may increase in 2020.

What the what???

It's OK. You still have very little reason to panic. But now would be a good time to go over what can trigger an audit, how to maintain preparedness (just in case), and how you can possibly avoid one.

You’re Better Off Than You Think

You may be surprised to learn that back in the Mad Men days of the 1960s, 5.6% of Americans could expect to be audited by the federal government. By 2018, the rate was around 0.6%. In fact, if you earn between $25,000 and $200,000, your audit rate is less than 0.5%.

Even millionaires are audited less frequently these days. In 2015, the audit rate for someone earning in the millions was about 9.5%. Three years later, only 2.21% were audited. 

The Incredible Shrinking IRS Budget

The number of audits fell partly because the budget for the IRS was cut by nearly 19% from 2010 levels. Workforce reduction hit 38%. Their workload increased. And the agency was expected to embrace taxpayer service over enforcement.

In 1998, changes to the law made it more difficult for the IRS to go after tax cheats. Now, it’s estimated than the “tax gap” for the US is nearly $458 billion in unpaid taxes. For sure, the government knows of $30 billion of known taxes that were incorrectly reported or have not been paid. 

Finally, Congress decided the IRS needed a raise. With more funding, the IRS can hire more people, answer more questions, and (maybe) conduct a few more audits. But don’t let your knees start to tremble. The chance of an audit won’t increase that much. With the rates at historic lows, the small increase allowed by the new funding is unlikely to raise your chances much.

It’s more likely that the agency will use the extra money to upgrade technology and process returns faster. Still, there is a small chance it will become more aggressive in auditing. 

Audit Triggers - The Usual Suspects

Audit triggers haven’t changed. The IRS uses computer algorithms to identify the returns to be audited. The biggest flag is simply a significant difference between last year's return and this year's or something that looks strange on this year's return.

• Certain deductions have always come under a microscope, including claiming auto, travel, and meal expenses.
• Casualty loss and bad debt write-offs are other signals to the IRS to look more closely into your business.
• If you run a business that shows losses year after year, the IRS begins to question how you can stay in business. They will want to take a look.
• Taking a deduction that doesn't fit can cause the audit-o-meter to go off. For example, if you are an electrician yet, you're writing off foreign travel. That's a head-scratcher, and the IRS will want to take a peek.

A huge sign that your return may need to be put under the microscope is if it doesn’t match the earnings documentation the IRS receives from your employer and financial institutions. 

That’s right. The IRS receives copies of your W-2s and 1099s according to your Social Security Number and other identifiers. When your return hits the computer, the IRS starts comparing numbers. If they don’t match, well…..

Not to make you nervous, but many of the computer checks are not counted in the IRS audit statistics. Your return may be screened and pulled without triggering an audit, but the agency still thinks there might be something there that warrants another look.

Lower Your Audit Risk

Honesty is the best policy. Don’t try to hide anything from Uncle Sam. Report all your earnings, including side gigs, commissions, investments, and interest that the bank pays on your savings, even if it’s minuscule.

Keep accurate records, so you claim the right deductions. Don't guess. Don't use round numbers. And keep the claimed deductions proportionate to your income. Giving $6,000 to Cornhole U. when you only made $12,000 last year might look a little suspicious. 

If you do happen to luck into some money and make a substantial deduction in relation to your income, be triple-sure to keep all documentation. You should keep records for everything anyway, and not just your bank statements. You need proof of payment and receipt. Keep receipts in physical or digital form, and organize them for easy search.

Most audits take place within three years of the filing date, so keep all your documentation at least that long.

Before sending your return, check your math, check for typos, check for any error that could make the IRS pull your return for more in-depth scrutiny. If you file electronically, you reduce your error rate in one fell swoop. The e-filing error rate in less than 1%. The error rate on paper returns is 21%. 

The Benefits of Using a Tax Resolution Firm to Reduce Your Audit Risk

Using a tax resolution firm not only reduces your audit risk, but you can have someone in your corner if an audit is performed anyway. Tax resolution firms like Top Tax Defenders do a lot of things for you: 

• Mediate with the IRS on your behalf. We make phone calls and answer IRS letters, gather and submit paperwork, file past due returns, and all the stuff you need to do to get square with Uncle Sam.
• Speak on your behalf during hearings and audits, making sure your rights are protected and observed.
• Help you avoid wage garnishment and levies
• Find ways to eliminate penalties and interest
• And sometimes, settle your tax debt for less than what you owe

Tax resolution companies have your best interests at heart. We know how scary audits can be, and we bring our expertise to bear, so you don't have to become a tax-attorney level expert overnight.

Peace of mind is what we offer, along with all the tax help. Top Tax Defenders is a bulwark between you and the big, bad IRS. So, even if your chances of an audit do go up in 2020, we’ve got your back.