An IRS audit is a review of an individual, partnership, or organization’s tax return and financial information to verify that reported information is correct. Tax return audits are serious events that should be taken seriously. An audit and its findings don’t always mean big trouble; if you do owe taxes, you might be eligible for an IRS payment plan.
Related: 8 Reasons the IRS Could Audit You
How Is Your Tax Return Selected for an Audit?
Statistically, your odds of getting audited are low: The IRS audits less than 1% of filers per year. For example, the financial reward to the government for discovering an error on a return with annual reported income of $40 million would be far greater than an error on a return with annual reported income of $40,000. If you make less than $200,000 a year, unless there’s something very unusual about your tax return like a large charitable donation deduction or an out-of-proportion Schedule C deduction, it’s unlikely you will be selected for a tax audit.
IRS Red Flags
If you’ve ever sat down with a tax professional or CPA to do your taxes, your tax professional might have talked to you about IRS tax return red flags and triggers, as well as audit statutes of limitations and how long to keep tax records. Common audit trigger events include failing to report income from foreign bank accounts and investments, overstated cost basis on assets, early retirement account withdrawals, and charitable donations.
You might be selected for an audit randomly or based on an algorithm. The IRS might compare your tax return against normal numbers for similar returns. If a math error is suspected, you could be audited to check your tax preparer’s work. Other audit trigger factors could be less random. A study led by the University of Kansas suggests that a company’s geographic proximity to an IRS office makes it more likely public companies will face an audit. That same study found those companies also engage in greater tax avoidance.
Find Out: 30 Ways To Prevent a Tax Audit
Types of IRS Audits
The IRS conducts three primary types of audits:
Correspondence by mail
In-person interviews at a local IRS office
Field audit that takes place at a taxpayer’s home office, place of business, or tax preparer’s office
The majority of individuals being audited will receive a letter in the mail that outlines the IRS audit process.
Avoiding Audit Scams
If you’re audited, you’ll be notified by mail. The IRS will not initiate an audit by telephone, email or personal visit. The IRS frequently warns the public of audit phone scams: If you receive a call demanding money, asking for personal information or threatening to have you arrested, report the incident to the Treasury Inspector General for Tax Administration by phone at 800-366-4484 or on the TIGTA website.
What To Do If You’ve Been Selected for an IRS Audit
In most cases, the IRS will only audit returns from the last three years. If you’re selected for an audit, speak with a tax professional about the best ways to prepare for an audit. If you need additional time to respond to the audit, you can file for an extension.
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This article originally appeared on GOBankingRates.com: What Are Your Chances of Being Audited by the IRS?