- There are certain red flags that can trigger an audit.
- For the most part, though, a tax audit isn't something to be concerned about.
Tax audits may not be pleasant -- but is it something to actively stress over?
There's a reason so many people find the idea of filing taxes stressful. Not only does it require you to sort through documentation, but it also opens the door to having your return audited.
But should tax audit fears keep you awake at night? Here's why you shouldn't sweat it.
1. Audits aren't common
In 2020, only 0.2% of all tax returns were audited, reports Jackson Hewitt. Now to be fair, that's an unusually low percentage, and it stems from the fact that the agency was short-staffed due to the pandemic.
But even before the pandemic, the percentage of tax returns being flagged for an audit wasn't very high. According to Jackson Hewitt, from 2010 to 2019, the percentage of audits dropped from 0.93% to 0.39%. So all told, fewer than 1% of all tax returns are commonly audited, even during normal times. As such, your chances of getting picked are extremely low.
2. Audits aren't too scary
You may have seen a tax audit play out on TV or in a movie, and it goes something like this: A scary IRS agent shows up at the door and starts ransacking an office to expose fraud, while yelling and threatening jail time.
In reality, your chances of meeting an actual IRS agent for an audit are slim. The reason? The IRS is sorely unstaffed and doesn't have the capacity to send auditors to your home to physically comb through your space.
If you are selected for an audit, it will most likely be conducted by mail. You'll generally receive an audit notice, and from there, you may need to gather documentation, including pay stubs, receipts for business purchases, and bank account statements, and send it over to the IRS for review. But in many cases, supplying further documentation will resolve the issue at hand, and you won't even have to have a live conversation with an IRS representative.
3. You can reduce your chances of an audit
Statistically speaking, very high and very low earners are more likely to get audited than moderate earners, and that's not something you can help. But there are steps you can take to lower the chances of being audited.
For one thing, don't guess at tax deductions. If you're claiming medical expenses on your taxes and you deduct an even $5,000, that might raise an eyebrow -- because how likely is it your total bills came to such a nice round number?
Next, make sure your deductions are proportionate to your income. If you own a small business that took in $100,000 in profit in 2021, but you're claiming $70,000 in business expenses, that's something the IRS might question compared to a seemingly more reasonable $20,000 deduction. Of course, if you have larger deductions that are legitimate, you can and should still claim them. But know that disproportionate deductions could raise your audit risk.
Finally, report all of your income, even if it's seemingly small amounts. If the IRS receives copies of 1099 forms summarizing your income from different sources, whether it's your bank or a client you worked for on a freelance basis, and the information you report doesn't match what the IRS has on hand, it could lead to an audit.
While nobody wants to get audited after submitting a tax return, the reality is your chances of having that happen are minimal. And even if your return does get picked, you can rest assured that most audits are resolved without a whole lot of hassle and pain.
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