A tax audit is any business owner’s worst nightmare. It involves examining a business’s tax return to ensure all information has been reported correctly based on tax laws. The ultimate goal is to verify the amount of tax you’re paying is correct.
While most company owners don’t need to concern themselves with tax audits, they can happen to even the most scrupulous and above-board individuals. Fortunately, you probably don’t need to worry about them. Here’s why:
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There Are Ways to Reduce Your Chances
Who knew that searching online for something as simple as ‘find a tax agent near me’ could reduce your chances of needing to worry about a tax audit? Tax agents help you perform accurate and complete tax returns that are free of mistakes and less likely to be considered for an audit.
Tax agents can also identify anything the IRS might question, such as deductions and credits for strange amounts, significant casualty losses, and business losses they might otherwise classify as hobbies.
The Chances Are Statistically Low
While you should never take it for granted that you won’t be audited, there is usually a low chance that it’ll happen to you unless the IRS picks up on any glaringly obvious errors. According to reports from 2020, the IRS audits approximately one in 220 individuals, whereas just a decade prior, that number was closer to one in 90.
The same report also pointed out that low and middle-income taxpayers are less likely to be audited than those considered wealthy. In the 2019 fiscal year, the IRS audited 0.45% of individual tax incomes, which was down by a significant amount from the previous year.
An Audit Doesn’t Mean You’ve Done Something Wrong
If the IRS has informed you that they’ll be performing a tax audit on you or your business, it’s only natural to panic. After all, the IRS has managed to pick up some fairly high-profile criminals by looking for inconsistencies.
However, you don’t have to have done anything wrong to be audited. They might target individuals with tax returns that don’t match up with IRS data, but they also randomly select tax-paying members of the public and above-average earners.
They Might Just Require Further Information
Many people rely on tax agents to assist with filing their taxes because they’re not confident in their own abilities. If you do manage your own taxes, there’s a chance that you’ll miss essential documentation the IRS requires. Or they may simply need clarification on something.
In that case, they might request a field audit, but that doesn’t necessarily mean you need to panic. Sometimes, you simply need to provide the information they require, and no further action is taken.
IRS Audits Don’t Go Back Several Years
If you’ve suddenly realized that you haven’t filled something out on your tax forms correctly a decade prior, you might panic about the IRS requesting a tax audit. However, the IRS rarely audits old returns. Most tax audits are performed on returns filed in the last three years and, in rare cases, up to six years prior.
The very thought of the IRS requesting a tax audit can be daunting, especially if you’ve always believed you’ve filed your taxes correctly. However, it’s crucial not to panic. A tax audit isn’t always a cause for concern, and you might be able to reduce the risk of one in the first place by relying on a tax agent to file on your behalf.