What You Should Know About IRS Audits

Once you’ve filed your return to the IRS, you’re finished with your taxes for the year — at least that’s the hope. But if the IRS has questions about your filing, your return could be flagged for an audit. The prospect of an audit can be frightening, but the reality is that the IRS audits around 1% or fewer of taxpayers each year. Due in part to its shrinking budget, the IRS reports it audited 1.2 million returns in fiscal year 2014 — about 12% fewer audits than in the previous year and the lowest number since 2005.  It’s unlikely that you’ll be audited, but if you are, it’s a big deal. Here’s what you need to know about how the IRS decides to audit you and what to do if it does. Your chance of an audit It’s tempting to think only your current year’s return can be audited, but the IRS can audit your past three years of returns. If returns look especially suspicious, the agency could go back as far as six years. The IRS uses the Discriminant Information Function system to determine which returns get audit-level attention. This system compares your return with others filed by people with similar professions and incomes and assigns it a DIF score. If the financial information in your return varies significantly from the information provided by your peers, your return gets a high DIF score, which increases the chances you’ll be audited. The DIF is more likely to trigger audits on the returns of high-income earners. Because the IRS has endured budget cuts over the past few years, it must focus its resources where it gets the most lucrative results. But while the returns reporting high income levels incur the greatest percentage of audits, taxpayers with more modest means still see their fair share.

We have seen a steady increase in IRS audits in several areas. There is a new tool the IRS is using to compare your reported merchant credit card totals to your total gross income reported on your business. If your not within industry averages......then guess what. IRS claims businesses are decreasing the cash they report in turn setting off these alarm bells for an audit. 

McVay Business Services know what the IRS looks for and how they conduct audits. Your best chance making through a successful audit is having a qualified accountant preparing your monthly books and year-end tax returns. Most IRS audits hit individually prepared tax returns 2 to 1 over having a professional sign your tax return.
Mike McVay, Accountant in Pensacola, FL
850-725-5696. www.pensacolafltax.com