Over the years, I have spent a fair amount of effort trying to get my readers to spend less time and money in fear of a tax audit. While an audit is never going to be fun and may cost you a lot of time and even money, the truth is that tax audits are pretty uncommon and becoming less and less common all the time.
For example, the IRS only audited 0.5% of tax returns filed in 2017. There is a higher audit rate for high earners, about 3% for those with $1M+ in income, but still not something to spend a lot of time lying awake at night worrying about, much less not taking legitimate deductions and credits that you should take because you fear they will trigger an audit. Most of the audits are “correspondence” audits, not “field” audits too. So it just means mailing some forms in or having your tax preparer do so.
However, the IRS is not the only entity that does tax return audits. States can also do audits, and the more states you file in, the more likely you are to be audited. I had one this year from the State of Utah. It was a “correspondence” audit, where they basically asked for some more information. The Utah Statute of Limitations on audits is 3 years from the later of the due date or the date the return was actually filed. This audit showed up 25 months after the return was filed. Here’s what the letter looked like:
That’s right. Utah audited me over $50. How this is worth their employee’s time, much less my time, is completely beyond me. $50 represents less than 0.1% of the tax I paid Utah for 2017.
When I read the letter, I had some recollection of dealing with this issue when I filed the return a couple of years previously. So I logged into my UESP (now My529) account to look at the form they sent the state tax commission. Here it is:
As you can see in the upper right hand corner, this is the corrected form that the auditor is asking for. Now, whether UESP never sent the form or whether the state tax commission lost it, I have no idea. But I really don’t care. The auditor was kind enough to leave his email address, so the next morning between patients I emailed it to him with this message:
I received your audit letter.
Letter ID: ——–, Account ID ——–, Period Dec 2017
I’ll try to call you in a couple of hours when you open, but I am attaching the documentation you should need to clear this up. The UESP form was corrected 3 years ago but either they never sent it to you or it was never entered in properly, triggering the audit.
Less than 3 hours later, he emailed back:
I appreciate you sending in this information to verify your UESP credit. I don’t believe we will need anything else at this time.
And the audit was over.
- Total time spent by me on it: 5 minutes
- Total money spent by me on it: $0
I think there are a few lessons that can be learned here.
- Most audits are correspondence audits just looking for more information.
- Most audits are triggered automatically by a mismatch between information provided by an outside reporting entity (on a W-2, a 1099, or in my case, a TC-675H) that differs from what you put on your return. Make sure all that stuff matches perfectly, but don’t worry as much about the stuff that only you report.
- In many cases, you did nothing wrong. The IRS reports that 29% of the time on returns for those with an income of $1M+ there is no additional tax due as a result of the audit. Although to be fair, on average they collect $62K (correspondence) to $143K (field) from these very high earners. Those numbers are 21%, $24K, and $32K for those with a more typical doctor income of $200K-$1M.
- Audits need not be long, drawn-out affairs requiring endless amounts of time.
- An audit may cost you nothing.
- You may not need professional assistance with an audit.
What do you think? Have you been audited? Was it federal or a state? What was your experience like? How much time did you spend on it? Was it their error or yours? How much did you end up paying? Did you handle it or your tax preparer? What did you learn from the experience? Comment below!