If you fear a tax audit each time you file, here’s a fact that might help you breathe a bit easier: The Internal Revenue Service (IRS) selects less than 1% of income tax returns for audit each year.
But what you may not know is that the IRS doesn’t need to audit you to hit you with additional taxes.
The agency’s computers are automated to scan returns and match reported income against data from employers and banks. Those scans flag anything that looks off.
When something doesn’t line up, you’ll get a letter. And while it’s not technically an audit, the result can be costly and painful.
The IRS knows more than you think
Every January, you receive a slew of forms for income — such as W-2s from employers, 1099-INT forms for interest earned and 1099-NECs for freelance work.
What you may not realize is that the IRS receives copies of all these documents too, often before you file your return.
Once you file, IRS computers compare what you reported on your income tax return against what third parties said you earned. If there’s a gap, your return gets flagged with no human review or official audit.
The system then generates a notice proposing additional tax based on any income you failed to disclose.
Here are some common situations that can draw IRS attention:
- Unreported 1099 income. Don’t forget the income from that freelance project you did or the interest from a high-yield savings account. If you received a 1099 and didn’t include that income, expect a notice.
- W-2 discrepancies. Sometimes employers make mistakes, or you might have multiple jobs and miss reporting one. Either way, the IRS’ computers will catch it.
If your numbers don’t add up to what the IRS has on record, you could find yourself needing to explain why.
What happens when things don’t match
When the IRS spots a discrepancy, you’ll typically receive a notice of a correction. This proposed adjustment explains what the IRS believes you owe and why.
These notices lay out the discrepancy, show the IRS calculation and give you options. You can agree and pay or dispute and provide documentation showing the IRS is wrong.
If you ignore the notice entirely, the IRS can assess the additional tax without ever opening a formal audit. The agency doesn’t need your agreement or even your participation to add charges to your account.
The cost of taking a risk
Some taxpayers figure the low audit rate gives them room to push boundaries, but automated matching has changed the reality.
Consider failing to report freelance income.
Even if you avoid a full audit, a tax bill from the IRS rarely comes alone. By law, the agency charges interest on underpayments — currently 7% per year, compounded daily — which accrues automatically regardless of the reason for the error.
The costs climb even higher if the IRS believes you were at fault. For errors attributed to negligence or a disregard of tax rules, you face an additional 20% accuracy-related penalty.
In the most severe cases where the agency establishes fraud, that penalty nearly quadruples to 75%.
Add in the cost of hiring professional help to respond, the time spent gathering records and the stress of extended IRS correspondence. That risk gets expensive fast.
And if you fail to act, the IRS can issue a levy to satisfy the tax debt. That can come in the form of seized-and-sold cars, personal property or real estate, or the IRS can garnish wages or take money from your bank account.
How to protect yourself before you file
The good news is that most IRS notices are avoidable with some basic preparation.
- Check every document. Before submitting your return, closely look at every income document you received. If you received a form, so did the IRS. Include everything.
- Keep records that support deductions. If you claimed business expenses, charitable donations or other itemized deductions, maintain documentation that proves the amount and the eligibility.
- Review past returns for consistency. Big changes in income or deductions from year to year can attract attention. Make sure you can explain any significant shifts.
What to do if you receive a notice
Never ignore IRS correspondence. Deadlines for disputing proposed changes are firm.
Read the notice carefully and identify whether it’s a misunderstanding that a brief response can clear up. If the IRS is correct, agree promptly to stop additional penalties and interest from piling on.
In trickier situations, consider getting professional help before responding. Providing too much information or the wrong documentation can sometimes create new problems.
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