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Learn How to Sail Through an Audit With Flying Colors
When you learn that you'll be audited on any type of account, you’ll be notified by mail with an explanation of the process. The records requested are the same records you keep for at least three years, so you should already have everything on hand that you'll need. Knowing what to expect in advance can help calm your fears and make the entire process much smoother.
What Happens When You Get Audited?
When you're notified of an audit, you'll get a letter explaining what items need to be examined by the auditing department. You may be requested to submit information for the auditor to examine, or an in-person interview may be scheduled so you can meet with someone. The in-person meeting, called a field audit, can take place at your home, at your place of business (if you are a business owner) or in your accountant’s office.
What Happens When Your Unemployment Benefits Account is Audited?
Hundreds of unemployment benefits accounts are audited each week. This system looks at randomly chosen accounts to detect overpayment and underpayment of benefits. This will also help the department detect fraud, monitor the accuracy of unemployment insurance and, if necessary, make changes to the system. Your work search, base period wages, work, earnings and reason for job separation are all examined in this process. If you keep all of your records for up to four years after you file your last benefits claim, you'll have the information you need in order to comply with an audit by unemployment.
What Happens When You Get Audited From the IRS?
Your initial contact by mail from the IRS may ask for more information on items such as your income, itemized deductions and expenses. Make sure that you mail information back with a delivery confirmation so you'll have proof of the date of receipt.
If, as the IRS requires, you keep your income tax records for three years, the information you need to send or show should be on hand. The IRS does accept some documents in the form of electronic records if you e-filed your return with tax software, but you need to contact your auditor to determine if they'll accept those in place of, or in addition to, your hard copy records.
The conclusion of an IRS audit results in a determination of no change, agreed or disagreed. No change means that the additional information is accepted and no changes are made to your income tax. Agreed is the determination made when the IRS proposes changes that you understand and agree with. Disagreed is when the IRS proposes changes you don’t agree with.
What Are Your Chances of Being Audited?
The percentage figures on audits by the IRS have decreased over recent years according to Tax Debt Help. Based on audits conducted on individual returns, the breakdown is as follows:
- FY 2013: 0.96%
- FY 2014: 0.85%
- FY 2015: 0.84%
- FY 2016: 0.7%
Your income level as an individual is another factor in the percentage of audits. As your income rises, your chances of an audit also increase. Here is a sampling of the statistics:
- $25,000-$49,999: 0.49%
- $50,000-$74,999: 0.41%
- $200,000-$499.999: 1.01%
- $500,000-$999,999: 3.62%
The chances of being audited by the IRS if you're a working mother and work part time are extremely low.
How Much Can You Claim for Charitable Donations Without Proof?
You may deduct charitable donations only if you file Form 1040, Schedule A, for itemized deductions. All donations must be to qualified organizations, and your deduction may be only the amount that exceeds the fair market value of the donation. For example, if you get tickets to a charity ball valued at $250 and you donated $500, then you list the charitable donation at $250.
For cash donations, such as weekly donations to your church, records must be maintained. You'll need written acknowledgement of the donations from the organization with the amounts and dates noted for contributions of $250 or more. Any amounts less than $250 don’t require this type of documentation.
If your charitable donation is non-cash, such as any type of property or automobile, and is over $500, you'll need to fill out Form 8283 to go with your income tax return.
What Causes You to Get Audited by the IRS?
Six red flags can prompt an IRS audit according to CBS News Money Watch:
- Income amount recorded on your return that differs from your W-2 and 1099
- Charitable donations excessive when your return is compared to averages
- Filing Schedule C for self-employment or a side business and claiming a loss
- Claiming a non-cash charitable donation of $5,000 or more
- Not withholding taxes from a nanny or housekeeper who earns $1,900 or more in a year
- Discrepancy between amounts on your return and your ex-spouse's return if receiving or paying alimony
What Penalties Result From Being Audited?
According to H&R Block, the IRS issues about 40 million penalties per year, and there are almost 150 types of IRS penalties. The most common of these are triggered by late filing and late payment of taxes.
The IRS reports that the penalty for filing late is 5 percent of the unpaid taxes for each month or partial month that the tax return is late. The penalty starts accruing one day after the filing date and will not exceed 25 percent of your unpaid taxes.
If you don’t pay your taxes by the deadline, you'll face a failure to pay penalty of 1/2 or 1 percent of your unpaid taxes. This starts accruing the day after the filing date and applies for each month or partial month after the due date.
If both the failure to file and failure to pay penalties are in one month, the maximum penalty in that month is 5 percent of both.
Filing your return more than 60 days late carries a penalty of the smaller of $135 or the unpaid tax amount.
How Not to Get Audited by the IRS
The best way to avoid being audited by the IRS is to double-check all information on your income tax return. Your income must match up with all of your 1099’s and W-2’s. Be sure you have necessary documentation for donations. Pay household employees properly, and make sure your alimony payments mirror the amount on your ex-spouse’s income tax return. Basically, just follow the rules. Don’t try to fudge on anything, and you should be able to avoid an audit.
- IRS: IRS Audits
- Tax Debt Help.com: IRS Audit Statistics: Rates and Chances of Receiving a Tax Audit
- IRS: Topic Number: 506-Charitible Contributions
- CBS News: 6 Red Flags That Can Get You Audited
- Minnesota Unemployment Insurance: Audit of Your Account
- H&R Block: How to Address IRS Penalties
- IRS: Eight Facts on Late Filing and Late Payment Penalties
Mary Lougee has been writing for over 10 years. She holds a Bachelor's Degree with a major in Management and a double minor in accounting and computer science. She loves writing about careers for busy families as well as family oriented planning, meals and activities for all ages.