Michelle Yeoh in “Everything Everywhere All at Once”.
Source: IMDB
Tax audits are rare
The tax audit has been a hot-button political issue since the Inflation Reduction Act, passed in August, was allocated $79.6 billion to the IRS over the next 10 years, with more than half the money earmarked for “enforcement”.
But according to Ryan Losey, a certified public accountant and executive vice president at CPA firm Piasik, audits are rare. “I have maybe two or three years, and that’s with 600 customers,” he said.
In fact, the IRS will audit 3.8 out of every 1,000 returns, or 0.38%, during fiscal year 2022, down from 0.41% in 2021, according to one recent report From Syracuse University’s Transactional Records Access Clearinghouse.
Typically, the IRS uses software to assign a numerical score to a return, and when the rating is high enough, it may Flagged for an auditMichael Prinzo, managing head of tax at Clifton Larsen Allen, explained.
“This is compared to the general population of other returnees with similar income or deductions and when there are outliers or multiple outliers, it increases the likelihood that one may get an audit notice,” he said.
Most audits are by correspondence
While “everything at once” shows a nerve-wracking in-person examination, Losey said most audits take place through “correspondence,” or letters that arrive by mail. You have 30 days to respond by phone or mail.
During fiscal year 2022, 85% of IRS audits occurred by correspondence, according to a Syracuse University report.
Alternatively, you may receive a letter saying you’ve been selected for an audit with an “Information Document Request,” or IDR, and specific questions about the return, Prinzo said. This may require speaking with an agent via phone call or meeting.
Taxpayers generally dread the IRS exam. There’s really no reason to worry.
Michael Prinzo
Managing Head of Tax at Clifton Larsen Allen
Still, many such audits happen remotely, Prinzo said, especially since the start of the pandemic. But if it’s an in-person exam and you’re working with a tax professional, that professional usually moves the location to his or her office.
After the audit, the IRS reviews the information provided and may send additional IDRs before deciding whether the return is correct.
If the agency determines the return is not correct, it will propose an adjustment outlined in a “30-day letter,” which gives the taxpayer a month to respond if it disagrees, Prinzo said. But many IRS exams close without any changes, he said.
“Taxpayers generally fear an IRS exam,” Prinzo said. But if your returns are correct and you have supporting documents, “there’s really no reason to worry,” he said.