What is tax audit defense and do you really need it?

This article was fact-checked by our editors and a member of the Credit Karma product specialist team, led by Senior Manager of Operations Christina Taylor.

Does fear of being audited influence how you file your taxes?

Maybe you have a tax professional do your taxes every year, believing they’ll back you up if your return ever gets audited. Or maybe you use DIY software to do your own taxes and stick with one that offers a paid audit defense service.

But your chances of being audited are relatively low, while fees for audit defense services can be difficult to predict. Let’s look at some things to know about audit defense services.

• What is audit defense?
• What are the odds of an audit?
• Should I pay for audit defense?

What is audit defense?

Some tax-preparation professionals, online tax-preparation services and DIY tax-software producers offer audit defense services. Generally, these services promise support should you ever face a state or IRS audit of a return you filed with the tax-service provider.

The level of support and actions the provider will take throughout the audit process can vary depending on the audit defense provider.

How does audit defense work?

Here are a few features that may be included with some audit defense services.

• Responding to audit notices on your behalf
• Defending your federal and/or state tax return in audit hearings or meetings with auditors
• Providing access to and support from audit representatives who may be tax professionals, such as Enrolled Agents or CPAs
• Helping you resolve tax debt or identity theft associated with the audit
• Paying any penalties or fees if you’re being audited because of a preparer’s or software’s mistake on your return

Important things to keep in mind

Prepaid audit defense is different from audit representation, which involves hiring a professional to represent you once the IRS has notified you that you’re being audited. Generally, you can’t get audit defense after you learn you’re being audited — you have to purchase the protection before you file your return.

And audit defense services may come with an expiration date. For example, a service may agree to cover your return for up to three years from the date the IRS accepts a return for a given tax year, since the IRS generally can include returns that have been filed within a three-year period in an audit — although the IRS may extend that timeframe to six or more years if it finds any substantial errors.

What are the odds of an audit?

You can think of audit defense as insurance for your tax return. For example, car insurance can protect you in case you’re ever in an accident. You pay for vehicle insurance based on the chance you may need it one day.

But while the odds of someone dying in a car crash are 1 in 106 (according to 2018 National Safety Council data), your chances of being audited are much less. In fact, out of all the returns filed in 2017 and reviewed during the 2018 fiscal year, the IRS audited just 0.5% of the 196 million tax returns it received. That means in 2018, the odds of being audited for all taxpayers were 1 in 200.

But higher percentages of certain groups were audited in Fiscal Year 2018. The IRS audited 6.66% of all returns filed in 2017 that had adjusted gross incomes of $10 million or more — a group that represents just 0.01% of all returns filed that year. Meanwhile, the service also audited 0.69% of returns with AGI of $1 to $24,999. That group represents 35.59% of all returns filed.

How could an audit affect me?

If you do get audited, prepare to invest some time in resolving your tax issue. How long an audit will take varies depending on several factors, including the type of audit, how complex the issue is, the availability of information needed, your and the auditor’s availability for meetings and whether you agree with the IRS audit results. But the average tax audit generally takes less than a year to complete, although the time could be less or longer (about two years).

And if you actually are audited, the outcome probably isn’t going to be in your favor.

Just about 3% of the nearly 1 million audits the IRS conducted in 2018 resulted in additional refunds to taxpayers. Meanwhile, individual income tax returns that were audited within the same time frame resulted in the IRS recommending more than $9 billion in additional tax.

Should I pay for audit defense?

In 2017, a whopping 61% of American taxpayers said that their fear of being audited influences how they report and pay their taxes, according to the IRS Comprehensive Taxpayer Attitude Survey. While your chances of facing an income tax audit may be small, having audit defense lined up in case you ever are audited could give you peace of mind.

But is it worth paying for?

If you’ve already paid triple-digit fees to prepare and file your return, you may balk at the idea of paying for one more tax-related service. And audit defense services will typically cost you something, whether it’s an actual fee for the service, or the cost of paying to file your tax return and getting audit defense as a “free” add-on.

Bottom line

You may fear being audited, but the odds of you facing a tax audit are low. But having audit defense lined up could bring you peace of mind if the thought of being audited stresses you.

If you decide to pursue audit defense, remember that you’ll generally need to enroll in a service before an audit occurs in order to use it. And it’s a good idea to ensure you understand exactly what protections the service you choose offers, how much it will cost and how it will work if you do get audited. And remember, you don’t actually have to pay for audit protection.

Christina Taylor is senior manager of tax operations for Credit Karma. She has more than a dozen years of experience in tax, accounting and business operations. Christina founded her own accounting consultancy and managed it for more than six years. She codeveloped an online DIY tax-preparation product, serving as chief operating officer for seven years. She is an Enrolled Agent and the current treasurer of the National Association of Computerized Tax Processors and holds a bachelor’s degree in business administration/accounting from Baker College and an MBA from Meredith College. You can find her on LinkedIn.