Are there any Advantages of a Tax Audit?

February, 16 2023 by Anne Davis, EA

In general, audits create stress and can occur for a variety of reasons. The most common situations when audits occur are if there are mismatches between the IRS’ records and the taxpayer’s tax return, or if there are unusual deductions on a tax return. They can also occur randomly when the IRS is checking for compliance on different types of tax issues, such as medical expense deductions or income from side hustles like driving for Uber or Lyft. Though being audited is involuntary and by no means considered enjoyable, they can provide multiple benefits such as:

1. Potential Refund
   
   
   • Gathering the documents in preparation for an audit can reveal missed deductions or overstated income that can result in a refund. For example, a self-employed taxpayer who is being audited for the supplies they deducted may realize when gathering their documents that they purchased more supplies than were initially deducted. In this situation, the additional documents can be submitted to the examiner and a request for an increased deduction can be made.
   
   
   • Reviewing a tax return in preparation for an audit may expose incorrect reporting that can be in the taxpayer’s favor, once corrected. I often see this when multiple states are involved: Taxpayers miscalculate the income that should be reported to each state and do not claim tax credits they are entitled to.
   
   
   
2. Educational value
   
   
   • You will become more tax compliant having obtained a better understanding of the types of documents that are required to substantiate deductions and income. For example, many taxpayers are not aware that verification for business miles driven is required. Verification can be shown using car repair and maintenance receipts that show the odometer reading of the business-use vehicle. For business miles to be deductible, examiners will often require documentation that shows odometer readings toward the beginning and the end of the tax year.
   
   
   • Just as many taxpayers are not familiar with the level of documentation required, many are not clear with the tax law itself. For example, many taxpayers believe that credit card and bank statements are sufficient to prove that their business expenses are deductible. However, proof of payment is only half of the requirement. The examiner needs to see the details of the purchase. Therefore, receipts and invoices are indispensable. I always recommend that taxpayers scan and save their receipts or make copies since they can fade over time.
   
   
   
3. Motivation
   
   
   • The lengthy process of an audit can serve as a motivator to keep accurate records going forward. Audits can easily take three to twelve months to resolve. Sometimes, multiple responses are necessary for an audit to be resolved accurately. This can result in prolonged stress for our taxpayers.
   
   
   
4. An Ounce of Prevention is Worth a Pound of Cure
   
   
   • You will be better protected from the negative impact of an audit if you apply what you learned during the audit process when preparing your future tax returns.
   
   
   • One negative impact of an audit could be that penalties and interest are assessed if additional tax is owed. Interest is almost never removed, and most penalties are difficult to get abated. But, if you prepare your tax return correctly, and you have the documents to substantiate what is reported on your tax return, the likelihood of future penalties and interest may be less.
   
   
   • The result of an audit will serve as a warning to proactively amend other tax returns that have similar errors and are still within the statute of limitations of being audited. Generally, the IRS has three years to audit a return after it is filed – but keep in mind there are exceptions to the three-year rule. Proactively amending tax returns could potentially avoid the assessment of certain penalties, lessen the accrual of interest, and possibly prevent the return from being selected for audit.

In summary, audits can be stressful, but they can yield valuable results such as unexpected refunds, practical and beneficial education, and the peace of mind of being compliant. And remember, you don't have to face an audit alone! The experienced tax professional experts at TaxAudit can help. We offer prepaid audit defense memberships as well as representation services for taxpayers who are currently facing an audit.