Navigating the IRS Audit Process: What You Need to Know

IRS Audit

As a doctor, one of the worst things to hear is that you’re getting sued. Another issue that doesn’t sit well is that you’re potentially facing an IRS audit.

I understand that a tax audit might be an inconvenience, but it’s usually not much more than that.  Luckily the chances are high that it’ll never happen at all.

But as you’re probably aware in the coming months, the IRS is in the process of getting some major additional funding to hire new IRS agents courtesy of the Biden administration.

The Inflation Reduction Act calls for IRS funding of almost $80 billion over the next decade thus ramping up their enforcement activity. Doesn’t sound like too much of an inflation reduction, does it?

In this article, we’re going to highlight why you may be audited, the 3 types of audits, the audit process timeline, and the best way to approach the audit process.


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2 Reasons Why You Get Audited

You get the letter in the mail from the IRS. You open it hoping that it doesn’t say what we all dread but unfortunately, you’ve been selected for an IRS audit.

Immediately your first thought is, “What have I done wrong?”

The site tells us that when they send you the audit letter, it doesn’t necessarily mean you’ve done something wrong or that there’s a problem.

The two main possibilities you might be selected are:

#1. Random selection and computer screening

Occasionally you may be chosen through a “random selection and computer screening” process which is based on a statistical formula.

In this situation, the IRS compares tax returns against “norms” for similar returns.

They develop these “norms” from audits of a random sample of returns and if yours doesn’t follow these, then you may be chosen for an audit.

#2. Related examinations

The IRS may select your returns when they involve issues or transactions with other taxpayers whose returns were also selected for an audit.

Examples may include any business owners, partners or investors you work with.

Other reasons you may be audited

Here are a few other reasons why the IRS may come knocking…

  • Claiming a home office deduction
  • Major income change or change in deductions from previous year
  • Rental losses
  • Several years of missing returns
  • Math errors (i.e. misreported taxable income)
  • Using your personal car for business
  • Claiming too many charitable deductions
  • Foreign currency transactions or bank accounts

How Common Is It To Get Audited?

There are multiple studies that address the “how common is it to get audited” question. Now that the IRS has access to an extra $80 billion, I’m betting that most of these previous studies will have to be redone.

What we can do is discuss how’s it’s been over the last few years. For example in 2020, Americans filed around 157 million individual tax returns and the IRS completed 509,917 audits.

By using these numbers, your overall odds of being audited roughly 0.3% or 3 in 1,000. This is down from the 0.6% audited in 2017 which was the lowest number in 15 years.

It seems that you have a better chance of living to 100 than getting audited by the IRS!

Typically, individuals that earn over $1M and those with income from a sole proprietorship, rental properties, partnerships, etc. have a higher chance of being audited.

  • itemized deductions
  • business profit/loss
  • rental income/expenses 

Normally a single issue in one of the three Schedules triggers the audit. 

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What is the chance of being audited by the IRS?

The overall audit rate is extremely low with less than 1% of all tax returns get examined within a year. 

How far back can the IRS audit?

Typically the IRS can audit up to the past three years. The timeframe is extended to six years for business matters.

Does filing an extension increase the chance of an audit?

The short answer is “no” even though this is a common misconception. Demonstrating that you’re aware of deadlines and need more time to acquire your documents can reduce an audit risk in most cases.

Does the IRS check every W-2?

Yes. The IRS receives a copy of every Form W-2 that you receive. When you file your return, the amount reported on it is checked against each one in the IRS database.

Does the IRS notify you of an audit?

Yes. You’ll never be surprised with an IRS audit. As previously discussed, they must send you a notice by mail informing you of the situation. 

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