The hidden cost of an audit

Taxpayers may be aware of some of the common triggers that lead to an audit by the Internal Revenue Service (IRS). These can include a large amount of wealth, having foreign assets and small business ownership.

In addition to these common triggers, the agency has also put technology to use with its new CP200 program. This program reviews tax returns with IRS information on taxpayer income to look for a discrepancy. The program will then flag any discrepancies for further review — potentially resulting in an audit.

Although it is helpful to know what puts a taxpayer at an increased risk of an audit, it is also a good idea to know the true cost of this examination. In addition to the stress that comes with a close review by the IRS, an audit can result in:

  • Additional tax bill. The IRS reports that over 90 percent of all audited tax returns result in a tax change, often meaning an additional tax bill. An audit conducted through the mail generally results in an average tax bill of $6,014, while a field audit averages a $21,918 tax bill.
  • Accuracy penalties. In some circumstances, the IRS can issue an underreporter notice. This can translate to a penalty fee that equals an additional 20 percent of your tax bill.
  • Time. Those who are going through an audit may find themselves spending considerable time gathering documents and communicating with the IRS to defend their tax returns. This can be mitigated by hiring legal counsel to advocate on your behalf.

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