True confession: every time a client calls or emails me with those faithful words “I’m being audited!” I cringe a little. Not because I’m afraid of the IRS, or even because I worry about the return they filed, but simply because.
It’s like seeing a police car behind you suddenly turn on their lights, even though you know you’ve done nothing wrong!
Yet every year, about 1 in 250 Americans get that audit letter. Why? Well, the IRS has never published a specific list of infractions that cause an audit, but they have given us hints over the years about some of the things that cause red flags to be waved about your return.
Let’s look at a few…
· The biggest one, by far, is failing to report ALL taxable income. Many times, of course, this is a simple mistake on the part of the taxpayer – maybe they forgot a bonus, or some small dividend, or even a part-time job or contract they only had for a month or two. Nevertheless, the tax law is simple: ALL income is taxable and ALL income is reported to the IRS both from the taxpayer and the entity that pays the taxpayer. Somewhere in the bowels of the IRS, those two numbers are matched up and when they don’t match, guess what? It either flags the return for an audit or the IRS simply sends you a bill for the untaxed income.
· Making “too much” is also another flag for an audit. The IRS is really in a can’t-win situation here, because if they audited all returns equally, they would get a huge backlash for “picking on” the poor AND, honestly, the amount they’d likely recover from a low-income audit isn’t really worth the time to investigate. That’s not saying that poor folks can cheat on their taxes, it’s simply a fact of life that lower-income returns aren’t on the radar as individuals. The IRS is likely to look for common threads among certain groups of flagged returns, though – do they all come from the same preparer or company? Once your income is over $200,000, though, the numbers of audits per capita rise significantly.
· Schedule C write offs – especially for big-ticket items like travel and meals – always seems to invite scrutiny. ANYONE who owns a business and claims Schedule C deductions knows that there is a lot of “gold” in those deductions, and the IRS does, too. If those deductions fall outside of a certain percentage, expect your return to be flagged and potentially, be audited.
Those represent some of the most obvious ones, but there are countless other ways your return gets flagged and the return auditing process begins. The good news – or at least, what should be good news – is that any CPA worthy of the name is going to assist you if they are the ones who signed the return you filed.
In other words – you shouldn’t have to go into an audit alone.
If you’ve been notified the IRS is going to be auditing you, the first thing to remember is this: don’t panic. Reach out to your preparer, let them know what’s going on, and then? Begin to gather the documentation you’ll need to verify your return. The good news is you should already have that.
…And while I never want to second-guess another tax professional, if you’ve got questions, me and the team are always here to help!