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How the IRS selects returns for audit, part 2
IRS audits happen. They can be annoying, even nerve-wracking, but understanding how IRS selects returns for audit can help relieve some of that stress.
The IRS has four methods for selecting returns for audit:
- Statistical analysis
- Missing information from third-party reporting
- Taking a questionable tax position
- Reliable reports raising suspicion
This part discusses the second method, missing information. Future posts will look at the other methods.
Including all reported information on your return is an easy way to avoid an IRS audit. You especially want to include all income reported to you.
But sometimes you either didn't receive the form, forgot to include information from one of these forms, or you reported the income somewhere IRS didn't expect it.
A typical case happens when a 1099-NEC reports income to an individual's Social Security number, even though that individual has been operating an entity, such as a limited liability company (LLC) with an employer identification number (EIN). IRS expects the income reported on a Schedule C, Profit or Loss from Business (Sole Proprietorship) and subject to self employment tax; however, it may have instead been reported on Form 1120-S, U.S. Income Tax Return for an S Corporation.
In cases like this, IRS will send you a notice via snail mail, usually a CP11. The CP11 indicates that IRS believes your return includes a miscalculation, so they made changes to your return, resulting in a balance due.
The notice indicates that you can pay the balance due if you agree with the changes, or you can respond if you don't agree. In either case, you should notify and discuss the notice with your tax advisor.
If IRS indicates income reported to you that doesn't seem familiar, you can review your Wage and Income Transcript, which lists each income from reported by a third party, such as W-2s and 1099s.
You can also allow your tax advisor to access your IRS transcripts and account. First, the advisor requests access via your IRS account. Then, you authorize the request within your IRS account. (More on delegating access to your IRS account later.)
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