Why Do Taxpayers Get Audited by the Internal Revenue Service?

Taxes can sometimes become highly overwhelming and frustrating. Because of this, the tax collector gets an unenviable duty of imposing a tax on the citizens and collecting it. And the Internal Revenue Service (IRS) is the tax collector at the federal level in the United States. IRS functioning aims to provide top-quality service to the taxpayers in America for handling their tax responsibility and applying the tax law with integrity. 

Most IRS work involves managing both corporate and individual income tax returns, which was around 253 million tax returns in 2020, according to a report. To address the tax returns, the IRS conducts audits to ensure that the taxpayers are paying the debt owed and not hiding any assets of their income. And during this, you need a tax advisor or tax representation service by your side. 

Regarding tax audits, today, we are talking about why taxpayers get audited by the Internal Revenue Service (IRS). So, let’s get started! 

Why do taxpayers get audited by the IRS? 

Tax audits are mainly conducted to minimize the difference between the total owed by the IRS and the amount they receive. Such a difference is called the Tax Gap. 

On not paying the tax debts, an IRS levy notice is sent to the taxpayers, reminding them about the unpaid debt and the intent to levy their bank accounts, wages, and assets if not paid within the due time. 

Usually, Tax audits are made randomly, but in some severe suspicious cases, the IRS examines people and selects them according to their highlighting financial activity. Here are some of the reasons why you can get audited: 

  • Calculation errors: You cannot afford to make an error while filing tax returns. It would help if you were focused and made sure you double and triple-check the calculation if you are doing it all by yourself. To ensure no calculation mistakes are made while filing tax returns, it’s always advised to use tax preparation software or hire tax advisors
  • Making generous donations: If you show the IRS that you make significant charitable contributions, they make some deductions. However, here you need to be careful not to make fake donations. That’s why to keep proper documentation with you to prove the donation’s validity. 
  • Not reporting a part of your income: This is an easy way to score an IRS audit. For example, suppose you have a steady job but took some freelance work. So, you only submit the W-2 form for the regular job and do not report the freelance income form, Form 1099. This 1099 form is for reporting nonwage incomes from interest, stock dividends, and freelance income. 
  • Too many business losses: This is primarily meant for business owners as they can show their personal expenses as business ones. However, if you report too many losses, it can create some suspicions. And then, the IRS will start looking into the IRS publication 535 containing all the details. 
  • Worker misclassification: A significant concern of the IRS is the additional area audits, representing high revenue loss. 

IRS does not collect the payroll taxes from the independent contractors because of the audit issue in such areas where the agents have previously received proper training that specializes in worker misclassification.

Purpose of IRS Audit 

The primary purpose and incentive behind the IRS audit are the different types of audits and the complete strategy made by the Internal Revenue Service. 

Every IRS audit is meant to verify the accuracy of the income and the amount deducted from the tax return. 

And after getting the knowledge of IRS Audit purpose, it’s possible to avoid the IRS’s scrutiny by the taxpayers. Plus, there is an affirmative possibility of experiencing the oddity of a satisfying income tax refund. 

Methods of selection for IRS audit 

There are several methods through which the IRS selects candidates for the audits. These are: 

  • Computer screening and random selection: IRS often prefers the statistical formula of return selection. In this, they compare your tax return to get similar returns against the norms created from audits of a random sample of returns. The IRS mainly uses this method to update its return selection process. 
  • Transactions with other taxpayers: Another way of selecting a return for audit is by issuing or transactions with other taxpayers, including business partners or investors whose returns have been selected for audits. 

After this, an experienced auditor will review your return, and if they plan to accept it, they’ll forward the return for assignment to the examination group.

During the Internal Revenue Service or state income tax audit, you need tax representation services that can act as your audit defence. It’s a legal or tax professional who answers on behalf of the taxpayer during the proceeding.

Final words 

The IRS’s examination of corporate and individual tax returns is known as income tax audits. With the help of examination, audit, and review, the IRS defines the different aspects of tax law enforcement and its administration. The sole purpose behind this audit is to ensure that the income, expenses, and credits are reported accurately or not. And if any suspicious financial activity is observed from your end, you may fall within the radar to get an income tax audit.