Few things are more unnerving than having your tax return selected for an IRS audit. The IRS uses that "audit anxiety" to help keep taxpayers honest. Audit anxiety is an important part of our voluntary compliance system. What determines whose returns will be picked for audit? A certain number of unlucky taxpayers will be picked simply to help the IRS gather statistics:
The TCMP Audit
DIF Scores Count
What interests the IRS?
1-2% of all individual tax returns filed in any year will be selected for audit. Higher-income taxpayers and those in target categories face a slightly higher audit risk than lower-income taxpayers. Absent fraud or substantial understatement of income, the IRS has three years from the due date of your return to initiate an audit. Typically, most returns are selected within two years of their filing date. The best defense in an audit is a two-part strategy: (1) Have supporting documentation for all deductions and credits, and (2) See your accountant immediately upon notification that you're being audited. A professional can put your mind at ease, find the information that the IRS wants more quickly than you can, and very likely will save you money in the long run by getting a faster and more favorable conclusion to the audit.