Nothing is more daunting to a taxpayer than the possibility of having their tax returns audited by federal or state tax authorities. Depending on the outcome, an audit could mean penalties, a huge tax debt that you may not even be aware of, and for some, it could also mean jail time. But do we fully understand what a tax audit really means and how one gets selected for an audit? More importantly, do you know what to do once you find yourself in this rather stressful situation?
What Is A Tax Audit?
A tax audit is conducted to review an individual or a business’s accounts, tax returns, and financial information to verify if the reported information and the disclosed amount of tax are correct. Being subjected to an audit doesn’t necessarily mean that there is a problem. Once it has been substantiated that there is nothing amiss in your returns, then the audit will be concluded. Otherwise, you may have to provide more proof to the tax authorities for further examination and review.
The Tax Audit Selection Process
The IRS has a slew of procedures to do statistical analysis and thorough evaluation to verify whether all the information you declared on your tax returns is correct.
First, tax returns are scored using the following computer programs:
1. The Discriminant Function System (DIF).
Tax returns are checked for red flags thru a computer program called the Discriminant Function System (DIF). This system rates the accuracy of all returns submitted to the IRS. The more red flags found on your tax return, the higher DIF score will be, which means that there’s a great likelihood that your tax return will be audited.
2. The Unreported Income Discriminant Function (UIDIF)
As its name states, this system’s main function is to rate a tax return’s likelihood of having unreported income. It analyzes a taxpayer’s income and expenses ratio and sees if it’s within the norm. Any discrepancies on this aspect will be flagged by the system.
3. The Information Returns Master File (IRMF)
This system serves as a huge repository of data submitted by employers and other third-party institutions required to report taxpayer’s income. The IRMF is used to ensure that all necessary information is provided to validate the reported income on your tax return.
Aside from these computer programs, The IRS also reviews other supporting documents just to check any disparity that may lead to an audit. Once selected, the IRS will send you a notification via mail. Keep in mind that the IRS will never initiate an audit by phone.
The odds of you getting audited is fairly low. During the 2017 Fiscal Year, only 0.6% of the total individual returns filed were audited. One contributing factor that may lead to an audit is the numbers you provide on your tax returns, regardless of your income. Undeclared income, large deductions, and credits relative to your earnings may cause tax authorities to further scrutinize your returns.
“What am I going to do?”
Once you receive that dreaded letter from the IRS, you will be given 30 days to respond whether you agree with their findings or not.
While it is imperative for you to act quickly to resolve this predicament, the biggest mistake that you will ever commit is to take matters into your own hands. Remember, you were selected for an audit due to the fact that there are discrepancies found in your tax returns. Depending on the issues found in your returns, tax authorities may utilize various audit techniques, request for more documents, and ask you further questions regarding your finances. At this point, you cannot afford to make a mistake as it could lead to hefty fines imposed against you.
On the other hand, if you ignore the matter thinking it would go away, you may find yourself in deeper trouble. Unlike other financial institutions, the IRS has the authority to take legal action against those who owe the agency a tax debt. They have the power to garnish your wages, levy assets, or even file a tax lien and eventually seize your property just to have your tax debt paid off.
When you have been selected for a tax audit, it is best that you hire professionals from a reputable tax debt relief company who are in full legal compliance with federal and state tax authorities to handle your case and guarantee that you get the best possible legal solution for your tax debt. These tax professionals understand your rights as a taxpayer. They can assess your situation and propose which among the tax relief programs available can best fix the difficult situation you are in.
Tax audits are a serious matter. But while it is a disconcerting situation to be in, know that you don’t have to deal with it alone. This is one situation where you would definitely need all the help you can get, especially from tax professionals who are highly experienced in handling the most complex tax debt cases. The sooner you get the help that you need, the sooner you will be able to find a resolution to your problem.