Turbo tax is a popular software package for filing income taxes accurately in order to avoid a potentially costly IRS audit. Audit letters arriving in the mail can be a significant source of anxiety and stress. Some of these notices are only to call the recipients’ attention to oversights such as a missed signature or a math mistake. More serious IRS letters address discrepancies in reported income or deductions.
In addition to a quality tax preparationsoftware package, tax filers are also advised to gather their needed paperwork ahead of time and to keep a few important numbers in mind. Although the process may seem intimidating at first, TurboTax has plenty of resources on the company’s website available to get newcomers started.
IRS officials often report that most taxpayers using TurboTax are honest about filling out their returns and only make mistakes by oversight. The IRS also has a variety of screening processes to catch those who purposefully submit inaccurate tax information. The decision to audit a certain return often comes from examining certain computer data algorithms. The first main thing that IRS agents will look for in 2012 taxes is the presence of numbers that do not add up or that should not be entered in certain columns. The first step to an audit is known as a review examination in order to verify a submitted return’s overall accuracy. On average, only a small percentage of filed tax returns are subject to audit within a given year.
Nobody likes being audited by the IRS, although the chances of being audited are now actually higher as there are more of them planned.
For those filing who had an income of over $200,000, IRS audits were increased by around 34 percent between 2010 and 2011. Despite this hefty increase, audit rates in general are still low, regardless of income amount.
For those earning over $200,000, almost 4 percent were audited for the 2011 year, and for those earning over a million dollars, audits were increased by 24 percent, with around 12.5 percent of those taxpayers being audited. The Washington Post, The Wall Street Journal and Bloomberg all noticed this and commented on it.
In actuality, you have a two percent chance of being audited, although the Treasury Department still requires tax advisers and preparers to assume that all returns will be audited.
Of course, the chance of being audited affects the advice given, and if a tax preparer tells you that something will probably be accepted, he or she has to assume the return may be audited. Although there is no sure way to avoid being audited, take a look at our 10 ways to audit proof your return.
Various things can trigger an audit, in addition to your actual income, including which items are claimed, your deductions and any tax credits. If you claimed the earned income tax credit (EITC) you generally have more chance of being audited.
A large income alone draws attention, but does not necessarily mean that you will be audited. However, for those of us who are lucky enough to be very wealthy, the IRS actually has a special task frce to handle those tax returns.
Receiving an IRS certified letter can be a huge shock. You walk out to your mailbox one day, flip through junk mail and bank statements, and then you see it. A large, scary-looking letter from the Internal Revenue Service. Of most concern is an IRS audit letter, but a certified letter may be a CP2000, an automated adjustment notice that tells you to pay taxes on income that may have been omitted due to error. In either case, you don’t have to simply sit back and accept their demands.
Along with your IRS certified letter, you probably received a copy of the IRS’s document called The Taxpayer’s Bill of Rights. In it, you’ll find one privilege in particular that can be especially important: the right to representation. Not only does this mean you can fight for yourself, but it also allows you to retain a tax attorney to work alongside you and help you deal with the IRS.
Once you have received your letter, you are required to respond or you could face penalties. You’ll have several weeks to prepare the necessary documents and gather evidence to argue your case. Your tax attorney, should you choose to retain one, can provide you with an exact list of the documents you’ll need, but usually these include your tax return(s) for the relevant year(s) and supporting documents as well as any other documents that the IRS specifically requests. Whatever you need, be sure to only provide copies of the documents to the IRS, not the originals, as you may need them in the future, and you don’t want to risk the IRS losing them.
Types of Audits
How you’ll provide these documents and interact with the IRS depends on what kind of audit it is. The three types of audits are:
A mail audit, in which correspondence is conducted via US mail. Usually, you will never meet the auditor in this scenario and may not even talk to them on the phone. In this case, it may be helpful to have a tax attorney go through the documents sent to you by the IRS and then draft replies.
An interview audit, in which you must go to your local IRS office with all of your documentation in hand and argue your case. Since you are on the IRS’s home turf, it can be extremely intimidating, and it may be fitting to consult with your tax lawyer to help translate the dense tax language and ensure you receive fair treatment.
A field audit, in which the IRS auditor comes to your home or business. These are mostly reserved for companies and home businesses. It is often recommended that the meetings occur outside of your home. In fact, it can even be helpful to conduct them at the office of your tax attorney.
Whether you’re subject to a mail, field, or interview audit, you can expect some back and forth between your side and the IRS. Once you provide the documentation, they may request more details on a particular part. If you dispute the amount, they may come back with a different number based on the documents you provide. Throughout the correspondence of your audit defense, be sure to maintain detailed records, including any phone conversations. Eventually, you may be able to prove that you do not owe any money, or you may be able to demonstrate that the amount is lower than they had assessed.
Leonard Williams is a tax and finance writer. Follow him at @LeonardW88 for more tips and advice.