Tax Audits Are on the Rise. Here's Why You Shouldn't Freak Out.
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Imagine getting a letter in the mail stating you owe someone $98,000. Now imagine that someone is the Internal Revenue Service.
Just the mere utterance of the letters “IRS” will give business owners and sole proprietors the chills. As you send in your yearly tax return, you can’t help but wonder: Will this be the year? No amount of hoarding receipts or carefully crafted tax returns can quite prepare you.
In my case, I had a client get a real letter requesting that very real amount of money mentioned above. The total they ended up paying? Zero.
If you’re getting audited, or you think you might get audited soon, don’t freak out. Take a deep breath and consider these reasons it won’t be nearly as bad as you’re imagining:
You’re not going to jail.
One of the first questions I get asked when someone’s getting audited is whether or not they’re going to go to jail. The notification of an audit, whether it’s a correspondence audit (in letter form) or in-field (an agent physically performs the audit), is the beginning of a long process that will likely take weeks or longer to play out.
It is not a legal summons or court order of any kind. In fact, it’s not even a legal notice that you need to pay whatever the IRS says you owe. It’s a notice with specific request to actively examine returns and associated materials. No need to catch up on Orange is the New Black, you’re probably going to be fine.
The IRS is what it used to be -- in 1950.
The IRS currently has about as many auditors as it did back in the 1950s, when the economy was just one-seventh the size it is now. Add to that the years of budget cuts and staffing for tax enforcement that has fallen by nearly a third in the current decade alone. And from 2010 to 2017, individual audits fell by 42 percent.
Your chances of having an agent come to your office and examining your returns and tax materials is the lowest it’s been in decades.
But with the lack of human resources, the IRS has turned to automation. Automation software looks for common mismatches, such as missed income, and spits out letters -- lots of letters -- asking for more money. While some of the letters aren’t actually audits (more on that below), it’s still unnerving. When my clients receive an audit, usually a correspondence audit, these days it’s likely been triggered by automation software.
The good news is that the majority of the time the data is actually there, it’s just not where the IRS expected it to be. While the process will still need to play out and take some time, the data is on your side and humanity will win nearly every time.
A letter from the IRS does not equal an audit.
While your chances of being audited are overall extremely low -- less than a percent by most accounts -- because of this reliance on automation it’s now much more likely that you’ll be contacted by the IRS in some form. In 2016, over 6 percent of taxpayers received some kind of letter from the IRS.
Usually, these are math-error notices or document-matching notices. Yes, it’s always stressful to open a letter from the government asking you for more money, but it doesn’t always mean it’s an audit.
These notices can generally be resolved easily. In many cases, you just need to correct the error or send in accompanying paperwork that was missed. But they are time sensitive, so it’s still important to talk with your tax preparer or accountant if you receive any kind of notice from the IRS.
You have firepower on your side.
Managing audits on your own can be stressful and time-consuming, especially when you still have a business to attend to. This is the time to call in the big guns.
Tax professionals are well versed in tax audits and can likely spot the issue quickly. Sometimes all it takes is a single phone call. And if it’s more involved, they’ll be there to manage the process so you can keep running your business.
In my experience, most of the time audits come out on the side of the auditee. While it might be tempting to simply write that check and get the IRS off your back, resist the temptation. The IRS is about revenue -- they’ll ask for the highest dollar amount even if it’s likely that you really don’t owe that much, if anything else at all.
Tax audits are like the boogeyman: The thought of them can be quite frightening, but when you turn the lights on and look under the bed, you find that there was never anything to be afraid of.
If you get a letter from the IRS this year, instead of freaking out, turn on the proverbial lights, follow the steps above and rest assured that you’re going to be just fine.