There’s a rapping at your door. You peek outside at the grim man in a drab brown suit and outdated spectacles, briefcase in hand, pocket protector secured. He’s the tax man and he’s there to inspect your records. The notorious audit - a nightmare feared among taxpayers.
Thankfully, the hype about auditing is nothing to lose sleep over.
Federal budget cuts have shaved down the odds of being audited. IRS funding, reduced by $2.5 billion since 2010, has forced the agency to trim its agent staff by 35%. Fewer agents have resulted in the equally steady decline of audits - about 40% less in 2017 than the seven years prior. Of the 1.1 million tax returns filed in Calendar Year 2016, only 0.5 percent were audited.
The lucky winners of most of these audits were chosen randomly. The IRS uses sophisticated computer programming to screen tax returns. The discriminate information function (DIF) is a formula used to determine which returns are worth further inspection. The DIF is a scoring system that compares returns of peer groups, based on similar factors such as job and income. You’ll earn a high DIF score (therefore raising a red flag and increasing your chances of being audited) when your financial data differs significantly from your peers.
Returns filed within the last two to three years are typically those selected for an audit. If a substantial error is identified, additional years may be included in your investigation - usually not more than the last six years.
If you are chosen for an audit, don’t pack up and leave town. Although the IRS gets a bad rap, the agency is easier to deal with than you may think. According to the 2017 Comprehensive Taxpayer Attitude Survey (CTAS), most taxpayers (79 percent) are satisfied with their personal interactions with IRS.
70 percent of Fiscal Year 2017 audits were conducted via correspondence. The remaining third were performed in the field, i.e., in person and way more intimidating. Even better, of the tax returns inspected, almost 34,000 resulted in additional refunds to the taxpayer totaling more than $6.0 billion.
Generally speaking, there isn’t much gray area when it comes to what you report on your tax return. It’s best to be black and white about your income, expenses and deductions. Some common items to avoid fudging with include:
- Irrelevant business expenses. Determine if the good or service is necessary to your job before you claim it.
- Unrealistic home-office deductions. Only claim what is entirely dedicated to your work life.
- Claiming repeated losses. If you’re self-employed and claim losses for three consecutive years, the IRS might downgrade your gig to a hobby.
- Large charitable contributions. Expect eyebrows to raise if you claim a $15,000 donation while earning $50,0000 annually.
- Excluding 1099 income. Side hustle income counts.
Additional info on audits can be found at irs.gov. Click the following link to be directed there now: https://bit.ly/2Gb5KVn.
Considering hiring a tax pro to make sense of it all? Call The LizLuke Team. We have a great resource and would be happy to connect you.
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