Audit rates are highest for ones who claim the largest adjusted gross incomes. Ironic, since most social media platforms are trying to get you to write just about everything off. After all, why shouldn’t we? Lots of reasons.
While the IRS does not have the labor to analyze every return it does utilize triggers that rank returns for errors. Here’s the list:
- If you received a W-2 or a 1099 of any sort, be assured, so did the IRS. if their information does not match what you reported you can be sure to get a letter.
- Your itemized deductions exceed IRS targets. Schedule A is where you claim Medical and Dental expenses, State and Local Taxes (SALT), Gifts to charity, Casualty and Theft Losses, and “Other Itemized Deductions”.
- Tax Shelter Losses such as Qualified Retirement Accounts, Insurance products, partnerships, municipal bonds, and real estate investments are all examples of potential tax shelters reducing one’s tax liability. There are also phase out and rollovers that send red flags.
- Business expenses beyond stated income are a red flag.
The IRS has set up a “Taxpayer Bill of Rights”, familiarize yourself with this. The IRS also has an Independent Taxpayer Advocate Service.
Keep in mind the IRS uses 3 main criteria for audits:
- Negligence: errors in entry.
- Willful: intentional misstatement
- Frivolous; throwing something in there just to see if it sticks.
Each level has its won penalty and interest on monies withheld regardless of reason.
Keep in mind that there is no period of limitation for willful and frivolous. These two are considered to be fraudulent and the IRS maintains that it can go back at any time to revisit this return. You have three years to amend your return and the IRS has three years as well.
When you fail to report an item which is more than 25% of the Gross Income, the IRS has 6 years after the return has been filed to assess additional taxes.
The IRS always checks your return for computational accuracy and clerical errors, missing signatures, inaccurate Social Security Numbers, address, not checking boxes, (yes even that Presidential Campaign Box). not entering your occupation ( this is used by the IRS to determine what is reasonable or excessive). Not dating, incorrect banking information, using a single account when filing MFJ, last but not least, the attachment sequence number found under the year, those forms must be in order!!! The IRS will politely send those back and if you are not quick about it could result in a late return.
Yes, You can file for free with the IRS, When you do this is what you don’t get. You dont get someone to represent you. Did your electronic return get rejected? Can’t understand why? You are on your own. Those letters you get, there is no one to go over them and help you understand the purpose behind them.
There are three types of audits
- Correspondence
- Desk/Office
- Field Examination
While you want to be expeditious about following through with the audits, do not allow the IRS agent to rush you before you are ready. Always schedule at your convenience.
Never volunteer records or provide information not requested. Yes, loose lips just might sink your ship. Your representation (F2848), may sit for your audit. The IRS must issue an Administrative Summons if they want you present. Be organized. Be prepared. Desk and Field Examinations can be recorded if you give a written notice no later than ten days of the appointment.
Remember, if your tax preparer talks you into a tax position that does not make sense or sounds too good to be true, it probably is. At the end of the day you’re responsible for what goes in your return. It is your obligation to provide your tax preparer all pertinent information to get the best options for a refund without being audited. You also do not want to do anything that will cause a rejected return or hold up your refund.
Finally, the IRS has a list of the “Dirty Dozen”, these are common tax scams that are still prevalent especially in this digital age. Of these the Offer In Compromise or Resolution businesses you hear on the radio are one of the biggest most hurtful scams to the common Individual Tax Payer.
Be diligent about keeping track of your records. Please do not hesitate to reach out to us if you have any questions about a tax letter you received, if you want to understand your tax situation better, if you have had any life events that may impact your return at the end of the year.