Top 5 Myths About Tax Audits (2024)

The myths about who or who does not get audited—and why—run the gamut. But, tax audits do not have to be feared. Find out the real deal when it comes to IRS audits and why most audit concerns are unfounded.

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IRS audits

An audit is arguably the most dreaded outcome of the tax filing process, and the situation carries with it some unsettling mystique. The standard nightmare has Internal Revenue Service agents with badges showing up on your doorstep, or the agency—seizing smorgasbord-style—the bulk of your personal assets. But audits contrast greatly from their thriving myths.

“Audits are something most people should not be afraid of,” says Sandy Zinman, tax committee chairman for the National Conference of CPA Practitioners. “A lot of times the government just doesn’t want to do these audits.”

In fact, Zinman says, one of the most enduring tax audit myths holds that an audit is a common occurrence. He says audits are generally “a lose-lose situation” for the IRS because they require a lot of resources and because of the negative image audits project onto the IRS.

“Historically, only about 1% of filers get audited. That’s a real small percentage,” said financial adviser Thomas Jensen, owner and managing partner of Vaerdi LLC in Portland, Oregon. The IRS did not respond to questions regarding specific details of its auditing process, including its total number of audits.

The IRS uses a system called the Discriminant Information Function to determine what returns are worth an audit.

The DIF is a scoring system that compares returns of peer groups, based on similar factors such as job and income.
If a person’s financial data differs significantly from those established by his peers, the system gives that return a high DIF score.
A high DIF score raises the chances that the filer will be audited, Jensen said.

Although the IRS audits only a small percentage of filed returns, there is a chance the agency will audit your own. The myths about who or who does not get audited—and why—run the gamut.

Myth: Be very afraid of an audit

The looming myth out there suggests the audit process is something to be desperately feared. But there are two kinds of tax audits: the "correspondence audit" and the in-person audit. The correspondence audit is the more common of the two IRS audits and some may not even realize it's an audit.

Most people who receive a letter or notice from the IRS only need to respond to a few questions.
In many cases, the IRS will ask you to simply verify some of your information or send an additional tax payment.

The other kind is the in-person audit. An IRS agent will request an appointment with you to review certain financial information.

“A lot of times it’s a very simple problem to resolve,” Zinman said. “What we’ll see is someone sold some stock during the year and forgot about it (when filing taxes) or didn’t even know what the stock was worth. So they can get a letter asking for information and actually get a refund because they lost money on the sale.”

Myth: You will have to meet with an IRS agent if you are audited

The majority of audits are triggered by missing information in tax returns, such as wages from a job, interest from a bank account, or income from selling an investment. Income like this is usually reported on a W-2 or 1099 form that you should receive at the beginning of the year.

The IRS also gets a copy of the W-2s and 1099s that taxpayers receive so that their computers can automatically compare the information on your tax return to what the IRS has in its files.

When your tax return and the IRS' files don't match up, it can trigger an audit. However, these encounters with the IRS are rarely face-to-face because the first and easiest step is for the IRS to mail you a notice, usually a CP2000 notice, asking about the discrepancy.

When responding to the notice, you can indicate whether you agree, partly agree or disagree with the information in the notice and the resulting change that the IRS is proposing to your tax return.

If you disagree, you can provide more information or submit an amended tax return that addresses the IRS' concerns. If you agree with the IRS, you can send them a payment with your response or set up a payment plan.

There are options to meet with an IRS employee about your situation by scheduling a meeting at a local field office. But, it's often far easier to resolve your issues by timely responding to their inquiry.

Myth: Those with low to moderate incomes don't get audited

Jensen said the IRS has ramped up the number of audits it does in response to the country's economic woes. That means people should not think they're in the clear if they do not earn a lot of money.

“(The IRS) is doing audits across the board, for all incomes,” said Jensen. “Over the last few years they’ve been hiring more people for that.”

Still, he reiterates that even though the IRS has increased its level of auditing, the number is a very small percentage of the returns filed.

Myth: Filing for certain deductions or credits increases the chance of an audit

Many people avoid taking certain credits and deductions—denying themselves tax advantages to which they are entitled—because they believe or have heard that taking them will make them more susceptible to an audit, says Clegg.

“I saw many thousands of people who said, ‘No, I don’t want to claim my daughter because she lived with my ex,’ or would not claim certain education credits out of fear," Clegg said. "Fear of an audit would cause people to just hand money over (to the government), money they were entitled to.”

Myth: Audits are done immediately

The IRS abides by a statute of limitations of three years after the due date of the return, says Clegg. For “substantial errors,” the IRS maintains it can go back six years and recommends you keep most records at least that long. The experts agree: If an audit is going to happen, it will occur in the latter half of the three-year time frame.

“Audits generally always happen two years after you file,” Zinman said. “You’ve got to understand all of the hundreds of millions of people who live in this country and (who) file returns, not to mention corporations. It takes a while for all of these filings to get done and the computer to get through this process.”

A deeper understanding

Although these are some of the most popular myths, experts say plenty of other misguided beliefs about audits run rampant, some even with their own regional flavor. The bottom line is to understand what the process is all about.

“You know, the American way is to work hard and pay the least amount of taxes that you can. It’s the same even for the people who work at the IRS,” Zinman said. “With filing taxes, you’re making an assertion on your return. You’re basically telling a story. You’re putting forth your story and if you’re questioned, the IRS is saying, ‘We read your story and we want you to show us where you got this info.’

“But people shouldn’t worry,” he said. “They’re not going to just come take all your money. They have a long process to go through before that. You have a lot of rights. If you owe the money, they’ll eventually get it, but as long as you talk to them, you don’t have to fear that something is going to happen to you without your control.”

State Audits

So many of the myths about auditing are quite narrowly focused on the Internal Revenue Service, suggesting that the IRS is the only entity that matters. That's a big-time mistake says Tim Clegg, a budget software developer and retired financial coach. Many people, he says, get through the IRS only to get “tangled up” with their state returns.

“More of the heartaches I’ve seen have had to do with state returns,” Clegg said. “The IRS is a puss*cat compared to a lot of these state (tax revenue) agencies. No one out there is hungrier for revenue than the states. They’re broke and working hard to get money. And they will not be as friendly, by and large.”

He recommends tax filers be at least as diligent and careful when filing their state returns as they are with their federal tax returns.

If you live in one state and work in another, Clegg noted, you must file returns for each state.

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As an expert in tax matters and IRS audits, it's crucial to debunk common myths and provide accurate information. The article discusses several misconceptions related to IRS audits, and I'll address each concept to ensure a comprehensive understanding.

Frequency of Audits:
- Myth: There's a common belief that audits are a frequent occurrence.
- Expert Insight: Historically, only about 1% of filers get audited, as mentioned by financial adviser Thomas Jensen. The IRS does not actively seek audits due to resource-intensive nature and the negative image associated with them.
Types of Audits:
- Myth: Audits are always intimidating, involving IRS agents with badges seizing assets.
- Expert Insight: There are two types of tax audits—correspondence audits and in-person audits. Correspondence audits, the more common type, often involve simple verification or additional tax payment. In-person audits are less common and usually revolve around a scheduled appointment to review financial information.
Initiation of Audits:
- Myth: Only high-income individuals get audited.
- Expert Insight: The IRS uses the Discriminant Information Function (DIF) to identify returns worth auditing. Audits are triggered by discrepancies in financial data compared to peer groups, not solely based on income. Audits are conducted across all income levels.
Audit Triggers:
- Myth: Claiming certain deductions or credits increases the chance of an audit.
- Expert Insight: Fear of audits leads people to avoid claiming legitimate deductions. Home office deductions, for example, do not automatically trigger audits. Audits are more likely when the financial picture presented in the tax return is atypical or beyond common sense.
Face-to-Face Audits:
- Myth: Audits always involve face-to-face meetings with IRS agents.
- Expert Insight: The majority of audits are triggered by missing information in tax returns. Initial contact is often through mailed notices (e.g., CP2000), and face-to-face meetings can be scheduled if needed. Timely responses to notices can often resolve issues without the need for in-person meetings.
Timing of Audits:
- Myth: Audits occur immediately after filing taxes.
- Expert Insight: The IRS operates within a statute of limitations of three years after the due date of the return. For substantial errors, the IRS can go back six years. Audits generally occur in the latter half of the three-year time frame, allowing time for processing the vast number of returns.
State Audits:
- Myth: Only IRS audits matter; state audits are less significant.
- Expert Insight: State audits can be more challenging and less friendly than IRS audits. Tax filers should be diligent when filing state returns, especially if living in one state and working in another.

In conclusion, understanding the audit process and dispelling myths is crucial for taxpayers. The goal is to empower individuals to navigate tax filings confidently and address any audit concerns based on accurate information.