Surviving an Audit
Even the most honest of taxpayers can be left trembling at the thought of an IRS audit. Let's face it — it's right up there with public speaking. To survive an audit, you've got to arm yourself with information. You should understand what the audit process is all about, why your return was audited, what your rights and responsibilities are, and how you can appeal the findings.
An audit is not an accusation of wrongdoing
An IRS audit is an impartial review of your tax return to determine its accuracy — it's not an accusation of wrongdoing. However, you must demonstrate to the IRS that you reported all of your income and were entitled to any credits, deductions, and exemptions in question.
The IRS generally must complete an audit within three years of the time the tax return is filed, unless tax fraud or a substantial underreporting of income is involved.
Certain returns run a greater risk of audit
Several factors can lead the IRS to single out your return for an audit. For instance, taxpayers who are self-employed, receive much of their income in tips, or run cash-intensive businesses historically have faced a greater likelihood of audits. The IRS may also pay more attention to professionals such as doctors, lawyers, and accountants (who often run their own businesses and do their own bookkeeping). In addition, if your itemized deductions in several major categories — e.g., medical and dental expenses, taxes, and charitable contributions — are greater than the statistical average, you'll generally have an increased chance of being audited. Other things that may lead to an audit could include:
A return that is missing required schedules or forms
A return signed by a preparer associated with problems in the past
A return reporting income of at least $200,000 (in general, higher income may lead to an increased chance of audit)