Worried About an IRS Audit? Read This

By Maurie Backman Markets Fool.com

If there's one thing taxpayers fear more than owing money to the IRS, it's the idea of being chosen for an audit. But while nobody wants to get audited, you should know that in most cases, tax audits aren't the harrowing process you see depicted in movies and on TV. Not only that, but your chances of getting picked are actually quite slim to begin with.

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Your odds of an audit are lower than you think

Though tax audits get a lot of hype, in reality, the vast majority of taxpayers never have to go through one. Each year, the IRS audits less than 1% of tax returns, and if you're not a particularly high or low earner, you're even less likely to make the list.

The following table illustrates your odds of getting audited based on your income level:

Income Level

Percent Audited (2014)

No income reported

5.26%

$1 $24,999

0.93%

$25,000 $49,999

0.54%

$50,000 $74,999

0.53%

$75,000 $99,999

0.52%

$100,000 $199,999

0.65%

$200,000 $499,999

1.75%

$500,000 $1 million

3.62%

$1 million $5 million

6.21%

$5 million $10 million

10.53%

Over $10 million

16.22%

DATA SOURCE: IRS.

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As you can see, it's not just high earners who are apt to get picked. The typical tax filer who reports no income at all is actually three times as likely to be chosen for an audit as someone who earns close to $500,000. And while taxpayers who break the $1 million threshold do have an increased audit risk, those earning between $500,000 and $1 million are less likely to have their returns selected than those who don't report income.

Most audits are a non-event

Here's something the IRS probably doesn't want you to know: In 2016, the number of taxpayers audited dropped for the sixth year in a row, and it's all because of budget cuts. In fact, the agency has lost an estimated 17,000 employees since 2010, making it all the more difficult to conduct the audits so many taxpayers dread.

IMAGE SOURCE: GETTY IMAGES.

In fact, more than 75% of audits are conducted solely by mail, which means most taxpayers never so much as lock eyes with an IRS agent. The typical audit involves the IRS sending out a letter requesting further documentation, and as long as you're able to back up your claims, you'll most likely resolve the matter quickly without causing yourself financial harm.

An audit could work out in your favor

Sometimes, in lieu of requesting more information, you'll get an IRS notice proposing an adjustment to your taxes. This is known as a CP2000 letter, and while it might point to an underpayment on your return, that's not always the case. Back in 2015, the IRS issued roughly 40,000 refunds totaling $1.1 billion to taxpayers whose returns were audited. If you get an IRS letter in the mail, don't panic -- there's a good chance its purpose is to inform that you are, in fact, due a refund for having overpaid.

You can lower your odds

If you're a higher earner or if you report no income at all, you may, unfortunately, find yourself on the IRS audit list despite your best efforts to avoid that fate. But if you're an average earner, there are things you can do to avoid further scrutiny.

First, make a point of only taking deductions that are 100% legitimate. If, for example, you're self-employed but don't use your vehicle for business purposes, don't take a deduction for it. Furthermore, make sure you have documented proof to back up every deduction you claim. There's nothing wrong with, say, claiming a $400 deduction for charitable donations if you gave away that much in goods, but if you don't have a record or receipt detailing that donation, think twice before you list it.

Along these lines, avoid guessing at your tax deductions. Instead, comb through your records, do your research, and make a point of putting down hard numbers only. If, for example, you've misplaced copies of your medical bills and claim $5,000 in deductible expenses, that nice even number might raise a red flag.

Finally, be sure to report all of the income you earn outside of your typical salary. Any time you get a 1099 form, whether it's for interest income, dividend payments, or compensation for a freelance job, the issuer is also required to file a copy with the IRS. If you don't include that income on your tax return, or if your numbers don't match what the IRS is seeing, you're likely to land on that audit list.

While the idea of a tax audit might seem scary, the chances of one happening to you are lower than you'd think. And the more honest and accurate you are when filling out your return, the less likely you are to get picked.

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