Do you want to know what the IRS transcript code means? Did you get an error code on WMR instead? Should You Pay For Audit Protection?
The IRS Refund Status Tool (formerly known as “Where’s My Refund”) and the IRS2Go app have a lot of reference codes that people want to know what they imply. Many people who file their taxes are getting IRS Reference Codes back, but they don’t know what they mean or if they are in trouble.
What do the different codes on the IRS tax transcript mean?” is a close second for individuals who check their transcript every day throughout tax season. Should You Pay For Audit Protection
If you don’t want to worry about transcript codes, you may find out when to expect your tax return by looking at the When To Expect My Tax return Tax Calendar.
Also, if you see a generic notification that reads “Refer to Tax Topic 152,” it only means to read these instructions about how to obtain your refund. You may find Tax Topic 152 here.
You can find a list of typical mistakes and problems here: IRS Where’s My Refund typical Questions.
What Is Audit Protection?
Before you buy an insurance product like audit protection insurance, it’s important to know what you’re buying. Audit protection doesn’t protect you from being audited. Should You Pay For Audit Protection
Nobody can prevent you from being audited. The IRS has the right to audit anyone, and its audit process is at least partially random.
Buying audit protection doesn’t protect you from being audited. In that sense, it’s a little bit like identity theft insurance. ID theft insurance doesn’t prevent you from having your identity stolen, but it can make the cleanup process a bit easier.
Audit protection is an add-on service provided by some tax filing companies. They guarantee that a certified tax professional will help you understand communication from the IRS. Should You Pay For Audit Protection
They will also help you draft response letters, so you can deal with the audit efficiently. Some audit protection packages will even reimburse you if there was a mistake on your taxes caused by the tax preparer. If you lied or didn’t provide the information, the audit protection won’t help. Should You Pay For Audit Protection
Could Audit Protection Be Beneficial for You?
As much as I like to poke fun at bureaucrats, the IRS is ostensibly reasonable to deal with. It sends audit letters using plain English and tax jargon, but the letters spell out exactly what the IRS needs. Here’s an example CP05 letter.
In most cases, individuals undergoing an audit need to send personal records. These include records for businesses you own, receipts for rental houses, and various forms that you need to fill out your taxes anyhow.
If you have great records, an audit shouldn’t end up being a huge deal. The audit may reveal a “contentious deduction” and the IRS decides you owe more money, but good records will mitigate most of the pain of an audit.
Unfortunately, online tax filing services cannot magically create good records for you. You (or your bookkeeper) need to maintain records throughout the year.
Sure, having an expert draft letters for you has some value, but not a ton. Great records will do much more to support you than audit protection will.
In general, spending money on bookkeeping software is a much better use than of your money than spending money on audit protection.
How Much Does Audit Protection Cost?
All of that said, the value of audit protection depends a lot on how much it costs. People who buy the H&R Block software (not online filing) get free in person audit support. Should You Pay For Audit Protection
This guarantee is the primary reason that people who are paying H&R Block (ie self-employed people, landlords, investors, etc.) may want to buy the software rather than file online.
If you’ve got a basic filing situation, the free audit support from H&R Block shouldn’t be a compelling reason to pay more. Online filers at H&R Block cannot get in-person audit support, but you can get help via email or phone.
At TurboTax, you have to pay at least $39.99 to upgrade to “Audit Defense” which is the audit program. To me, this is a high price to pay for a minimal service guarantee.
FreeTaxUSA and TaxHawk offer audit defense for $19.99, which strikes me as a reasonable price to pay for the service if you’ve got complex taxes. Should You Pay For Audit Protection?
Should Anyone Consider Audit Protection?
If you’ve got simple taxes like a W-2 job and a few 1099-INT forms, audit protection isn’t worth anything. On the other hand, people who take advantage of every tax-advantaged account, have multiple businesses, and invest in MLPs will have tons of records. Should You Pay For Audit Protection?
Even if you keep great records, you may need help explaining your unique situation to the IRS.
I’m wary of recommending audit protection to most people. I think when most people understand what audit protection is, they won’t opt for it. If you can get audit protection for free (or really inexpensively), you could make argue for it. Should You Pay For Audit Protection?