Audits can happen when you least expect them. For most people the mere mention of the word "audit" elicits nightmares of being cuffed and taken to prison. The reality is there's a lot of misinformation out there that makes people panic easily.
By knowing tax auditing basics you'll be better informed and better prepared in case you ever get audited.
How People Are Chosen for Audits
The IRS uses software that compares your return with similar returns. If something seems a little off then they may pick you for an audit.
Audits may also happen if your situation changes drastically from one year to the next. For example, maybe your business tripled it's income. Or, maybe your mileage one year was 3,000 miles and the next year it was 30,000.
The IRS also keeps an eye out for credits they know have a tendency of being used fraudulently. It's important to note that while some scenarios may raise more suspicion than others, that anyone can get audited. Sometimes your number is picked just as if you were in a jury duty pool.
You Don't Go to Prison for Owing Money
The first most common myth is that you'll go to jail if you owe the IRS some money. Contrary to popular belief this is not true. You can go to jail for some high level fraud on your taxes (Real Housewives of New Jersey, anyone?) but not because you owe some money. In fact, the IRS employees are actually very nice when helping you set up payment plans.
Statute of Limitation on Tax Audits
The second most common myth is once your return has been accepted that you won't get audited. Actually, in most cases the IRS has three years from the date of submitting your return to audit you. In fact, most audits occur within the last two years of the statute of limitation.
The statute of limitation doubles if you withheld a certain percentage of your income and it may be nearly non-existent if you are suspected of serious fraud.
Your Rights as a Taxpayer
Don't worry though, you have rights as a tax-payer and the IRS can't just yell "Fraud!" at will. They actually have a very high burden of proof when they are auditing someone.
If you are being audited the IRS has a strict code of conduct they must follow. Furthermore, you have the right to fight them if you think they are wrong and can tie them up in court for years if you'd like.
The point is that contrary to popular belief the IRS is not infallible and has to respect due process and taxpayer rights.
The Auditing Process
Another common misconception is that the auditing process is arduous. Again, this is completely false. According to the IRS website the majority of audits are conducted via mail and just require you to verify a line item.
The number one way to make the process is easier is to make sure you keep organized and consistent financial records throughout the year. Otherwise it will be a mess for you.
For the most recent information on tax auditing make sure to visit the IRS website for videos, FAQs and guides.