How To Avoid and Survive an IRS Audit

Every year, the Internal Revenue Service examines (aka audits) a small percentage of U.S. tax returns to verify that the tax reported is correct. Both individual returns and corporate returns can be subject to an IRS audit.

What are my chances of being audited?

You are more likely to get struck by lightning. That may be an exaggeration, but the reality is that most taxpayers have only about a 1 percent chance of being audited by the IRS. If your annual income is more than $5 million, your chance of being audited goes up to 20 percent. Ironically, if you have no income, your chance of being audited is 3 percent.

The overall audit rate for business tax returns fell from 0.71 percent in 2012 to 0.61 percent in 2013, but audit rates are higher for small C-corps than for partnerships and S-corps. For small corporations (assets less than $10 million), the audit rate in 2013 was 0.95 percent.

Why would I get selected?

Being selected for an audit does not necessarily mean there is anything wrong with your return. The primary way the IRS selects taxpayers to be audited is through computer scoring, known as the Discriminant Inventory Function system (DIF). Your return is entered into the computer and assigned a numerical score based on a variety of factors. Audit “risk” factors include low gross profit margin, high deductions such as auto, travel and entertainment expenses, and little or no profit from business operations.

Additional factors that can trigger an audit include when taxable income on your return doesn’t match amounts reported on forms to the IRS (W-2, 1099), mathematical errors, charitable contributions disproportionate to your income, claiming the home office deduction, and complex business or investment transactions.

Are there different types of IRS audits?

There are three main types:

Correspondence audit: You mail in specific information requested by the IRS. This type of audit is the most common and least cumbersome.

Office audit: You take specific information requested by the IRS to their office.

Field audit: The IRS agent personally comes to your place of business. You are wise to have your attorney or accountant present for this meeting.

How can I survive an IRS audit?

First of all, don’t take it personally and don’t panic.

Next, seek professional advice if you feel you need it or want it (probably a good idea). You could ask a tax professional to look at the IRS notice and give you some suggestions. 

I had a client whose business underwent a correspondence audit. After we discussed the notice, she prepared schedules and documentation that she sent to us to review before mailing them to the IRS. She saved money on our preparation fees, but still felt confident in the information she was submitting.

Remember, you can postpone the audit if you need more time.

Here are some other tips:

• Don’t host the audit if you can avoid it. Instead, try to go to the IRS office, or have a tax professional handle it in their office.
• Only provide the information that they are requesting. Less is more!
• If you are missing receipts or documents, you are allowed to reconstruct records.
• Be organized and prepared. It gives you credibility if you can answer their questions and produce requested documents.
• Know your rights. Read IRS Publication 1, “Your Rights as a Taxpayer.”

How to know if it's a scam

It’s important to note that the IRS does not contact taxpayers via email, text messages or social media. If you receive an email from the IRS, it is a scam! If you have questions about any notifications you receive, you can contact the IRS directly via phone or in person at a local IRS office, or you can consult your accountant.

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Lisa Kahn Grossman is an associate principal in the Entrepreneurial Services department of Kaufman Rossin. She works with entrepreneurs, high-net worth individuals, and nonprofits. She is a certified QuickBooks ProAdvisor, a licensed Certified Public Accountant in the State of Florida, and a member of both the American Institute of Certified Public Accountants and Florida Institute of Certified Public Accountants.