If you’re earning under $200,000 per year, you might just be the IRS’s most wanted. A recent WSJ article (April 2024) found that 63% of all new IRS audits since summer 2023 were aimed at middle-class filers.
Since roughly one third of Americans meet the definition of “middle class”, there are many individuals worried that they are being targeted for an audit.
Understanding the process of an IRS audit can help alleviate some of the stress and prepare you for what lies ahead.
Too Long; Didn’t Read
- 63% of new IRS audits as of summer 2023 targeted taxpayers with an income of less than $200,000.
- The IRS has a three-year window to audit your financials, but they can look as far back as needed in cases of fraud or failure to file a return.
- Audits can range from taking a few months to over a year depending on the audit type and complexity.
- The IRS could audit you due to random selection, complicated tax situations, red flags or discrepancies, related audits, or previous compliance issues.
What is Middle Class Income in 2024?
Before we dive deeper, let’s define what constitutes middle-class income in 2024. The Pew Research Center defines a middle-class earner as someone who earns an income between two thirds and twice the national median income.
Middle class varies greatly by state. In Massachusetts, middle-class earners are between $62,986-$188,976. On the other hand, Mississippi middle-class earners fall between $35,142-$105,438.
Here’s a middle class calculator if you’re curious where you fall: Pew Research Center Income Calculator
The Startling Statistics
A recent article by The Wall Street Journal shared a surprising statistic: 63% of new IRS audits as of summer 2023 targeted taxpayers with an income of less than $200,000.
The Biden Administration pledged to have the IRS target high-income earners (individuals making over $400,000) while easing the burden on the middle class, but that has not been the case.
A report by the U.S. Treasury Inspector General for Tax Administration (TIGTA) showed that the IRS has fallen behind in its strategic operating plan to overhaul its auditing structure. Of the 58 milestones set for 2023, the agency completed only 19.
Overall, the IRS has been lacking with these organizational changes.
Related: How the Pentagon Failed Its Sixth Consecutive Audit
How Far Back Can the IRS Audit?
One of the most common questions taxpayers have is how far back the IRS can scrutinize their tax returns. The general rule is that the IRS has a three-year window from the date you filed your return to initiate an audit. However, there are exceptions to this rule. If the IRS suspects substantial underreported income, the agency can extend the audit period to six years. In cases of fraud or failure to file a return, the audit window becomes limitless, allowing the IRS to investigate as far back as necessary.
How Long Does an IRS Audit Take?
The length of an audit can vary depending on the complexity of your tax situation and the type of audit. For a relatively straightforward mail audit, the process can be resolved as soon as a few months. However, if the audit escalates to an in-person examination or a field audit, where an IRS agent visits your home or business, the process can take over a year.
What Does an IRS Audit Letter Look Like?
If you’ve been selected for an audit, you’ll receive an official letter from the IRS. This letter will outline the specific items or tax years under review, as well as the type of audit you’re facing (mail, office, or field). The letter will also provide instructions on what documentation you need to provide and any deadlines you need to meet.
It’s crucial to note that the IRS will never initiate an audit via email, text message, or phone call. If you receive such communication claiming to be from the IRS, it’s likely a scam, and you should exercise caution.
What Happens if I Fail an IRS Audit?
If the IRS determines that you underpaid your taxes or made errors on your return, you may be required to pay additional taxes, interest, and penalties. The penalties can range from 20% to 75% of the underpaid tax amount, depending on the severity of the issue.
In severe cases, such as intentional tax evasion or fraud, you could face criminal charges, including hefty fines and potential jail time. However, these scenarios are relatively rare, and the IRS typically reserves criminal prosecution for the most egregious cases.
Why Would the IRS Audit Me?
There are numerous reasons why the IRS might choose to audit a taxpayer, and understanding these triggers can help you prepare and potentially avoid future audits. Some common reasons include:
Random Selection
The IRS randomly selects a certain percentage of tax returns for auditing each year. This process helps the agency identify potential issues and ensure compliance across the board.
High Income or Complex Tax Situations
The general claims are that individuals with high incomes or complex tax situations, such as business owners, real estate investors, or those with substantial deductions, are more likely to be audited.
Despite the claims that high income individuals are audited more, 63% of all new audits last year targeted individuals with income under $400,000. If the IRS keeps their word, we should see a decrease in audits of the middle class and an increase on the upper class in the future.
Discrepancies or Red Flags
If there are discrepancies between the information reported on your tax return and the information the IRS has on file (e.g., from third-party sources like employers or financial institutions), it could trigger an audit. Similarly, if your return includes unusual or excessive deductions or credits, it may raise red flags.
Related IRS Audits
If someone you’ve done business with or have a financial connection to (e.g., a business partner or investor) is audited, the IRS may decide to audit you as well to ensure consistency in reporting.
Previous Audits or Compliance Issues
If you’ve been audited in the past or have had compliance issues with the IRS, you may be more likely to face future audits as the agency monitors your tax behavior.
Final Thoughts on IRS Audits
While an IRS audit can be a daunting experience, understanding the process can help you navigate it more effectively. The majority of audits resolve through correspondence or in-person meetings, and many taxpayers will not owe additional taxes.
However, if you do find yourself facing an audit, it’s essential to cooperate fully with the IRS, provide all requested documentation, and consider seeking professional tax assistance if your situation is complex or if you disagree with the IRS’s findings.
By staying informed, organized, and proactive, you can minimize the stress and potential consequences of an IRS audit, ensuring a smoother and more favorable outcome.
