Tax audits remain one of the biggest fears taxpayers have it comes to dealing with the IRS. Increased scrutiny from the tax agency could require you to submit additional paperwork and possibly pay more in taxes.
Information on audits can help you decrease your chances of attracting the attention of the IRS.
A low rate of audits
Information from CBS News reports that the IRS conducts about half of the audits it initiated only a decade earlier. Audit rates have fallen from about 2% of all filings in the 1970s to about 0.4% of tax returns in 2019. Still, you cannot assume that you will not receive a request for an audit at any time, as at least a portion of audits falls into the random category.
The IRS also has limited resources and has a list of things it wants to accomplish with audits. For example, the possibility of an audit probably leads to higher compliance and accuracy in tax returns. The agency also wants to earn a favorable return when it does engage in an audit.
A formula for reducing audit likelihood
Because certain red flags can make an audit more likely, you do have some control over your audit chances. Reporting all income accurately will help. If you have a side job make sure to report all of this income. If you receive interest income from savings or checking accounts, this also must go on your tax return. High write-offs for business expenses or losses could also increase your chance of an audit.
If you do become a target of a tax audit, make sure to respond quickly. You should keep all of your tax records for at least three years.