There are certain anomalies in a tax return that can 'trigger' a tax audit, but each year the ATO chooses a number of specific areas of focus, and will often conduct random audits on tax returns these show up in.
The reason for this is to do with what has been included or excluded in your tax return; for example, attempting to reduce taxes by not correctly including income or incorrectly overclaiming deductions can trigger an ATO Audit.
Selection for an audit does not always suggest there's a problem. The IRS uses several different methods: Random selection and computer screening - sometimes returns are selected based solely on a statistical formula. We compare your tax return against "norms" for similar returns.
We do this by selecting some tax returns, activity statements and other documents for checking. If we check your affairs it does not mean we think you are dishonest. Even if we find a discrepancy we accept that mistakes can be made. If the law allows us to, we take this into account when we consider any penalties.
For most taxpayers with simple affairs, the tax office can go back two years, while if your tax affairs are more complex they can go back four years.
The ATO can, and will, check your bank accounts, cross reference payments against an ABN and confirm missing income from your tax return.
An ATO spokeswoman said phones were only accessed with a warrant under the Crimes Act, or with written consent from the owner. "For operational reasons, we do not disclose information about when different tools are used as part of our operations," she said.
(Source: IRS Data Book, 2020.) Overall, the chance of being audited was 0.6%. This means only one out of every 166 returns was audited—the lowest audit rate since 2002.
Don't worry about dealing with the IRS in person
Most of the time, when the IRS starts a mail audit, the IRS will ask you to explain or verify something simple on your return, such as: Income you didn't report that the IRS knows about (like leaving off Form 1099 income)
Audits can be bad and can result in a significant tax bill. But remember – you shouldn't panic. There are different kinds of audits, some minor and some extensive, and they all follow a set of defined rules. If you know what to expect and follow a few best practices, your audit may turn out to be “not so bad.”
The overall audit rate is extremely low, less than 1% of all tax returns get examined within a year. However, these nine items are more likely to increase your risk of being examined.
However, there's always the possibility that you could face an audit, and, if you're found to have misrepresented your income, tax audit penalties can be serious. Consequences range from stiff fines to criminal charges, and you could be buried under a mountain of paperwork.
You could face civil penalties.
Bigger understatements mean bigger consequences. In this case, the most common penalties are: Negligence penalty: 20% of the additional tax. Fraud penalty: 75% of the additional tax due to fraud.
Tax fraud is a serious criminal offence that carries a maximum penalty of 10 years imprisonment. Ignorance of the law is not a defence. Neither is failing to get proper legal advice.
In recent years, the IRS has been auditing significantly less than 1% of all individual tax returns. Plus, most audits are handled solely by mail, meaning taxpayers selected for an audit typically never actually meet with an IRS agent in person. Also, increased audits won't happen overnight.
Can you go to jail for an IRS audit? The short answer is no, you won't go to jail.
A tax audit doesn't automatically mean you're in trouble. While it's true the IRS can audit people when they suspect they have done something wrong, that's often not the case. The IRS audits a portion of the taxpaying public every year. You can be selected purely as a matter of chance.
IRS audits individuals to verify if they accurately reported their taxes and, if they didn't, to determine if more taxes are owed. Audit trends vary by taxpayer income. In recent years, IRS audited taxpayers with incomes below $25,000 and those with incomes of $500,000 or more at higher-than-average rates.
two years for most individuals and small businesses. two years for most medium businesses (see note 2) four years for all other taxpayers (see note 3).
If there's one thing American taxpayers fear more than owing money to the IRS, it's being audited. But before you picture a mean, scary IRS agent busting into your home and questioning you till you break, you should know that in reality, most audits aren't actually a big deal.
No – you cannot go to jail if you are unable to pay your taxes in Australia. If the issue is simply that you cannot afford to pay, you will not be imprisoned. However, tax fraud, also known as tax evasion, is a serious crime with the maximum penalty including a term of imprisonment.
The ATO can search your property without a warrant
The Tax Office has the power to forcibly enter a property and search for documents without a warrant.