Getting a letter from the IRS can be anxiety-inducing, but there are misconceptions about audits and who gets audited. With the IRS receiving additional funding, audits are expected to increase, especially for large corporations, partnerships, and high-wealth individuals. There are three types of notifications the IRS traditionally sends: adjustment letters, correspondent audits, and examination audits. Adjustment letters inform taxpayers of changes in their refund amounts, while correspondent audits request additional documentation. Examination audits, which are rarer, may involve a face-to-face examination with the IRS.
Audit rates have decreased in recent years across all income levels due to funding issues. Errors or missing information on a tax return are common triggers for audits, as well as random selection or association with another audited taxpayer. Higher-income earners, especially millionaires, are more likely to be audited. Declaring little to no income can also raise red flags. Black taxpayers are disproportionately audited, potentially due to cost-cutting measures and algorithmic selection methods. The IRS prioritizes correspondence audits, which are less costly and labor-intensive.
The IRS can generally audit returns from the past three years, with a focus on the last two years. If a substantial error is found, additional years may be included in the audit. Taxpayers should retain their records for at least three years and, for added security, up to six or seven years. The government has six years to claim revenue or initiate legal proceedings for a substantial understatement of income. It’s essential to keep accurate records to avoid potential issues with audits.
In an effort to address racial disparities in audits, the IRS is under pressure to focus on individuals unduly receiving refunds rather than those committing tax evasion. The Earned Income Tax Credit (EITC) is a common target for audits, particularly for lower-income individuals. The IRS is urged to treat all discrepancies in refund claims equally to reduce disparities. Overall, understanding the audit process and being prepared with accurate records can help taxpayers navigate potential IRS audits confidently.
