Another Way The IRS Chooses Audit Targets

As long as I can remember, The Internal Revenue Service (IRS) has put individual income tax returns through a matching process. This is a part of the grading process that determines whether or not your return will be referred to the audit division.

The Service already has all or most of the items that go into your return. Your W-2’s, 1099’s, 1098’s and most of the other forms used for 1040 preparation are already sent into the Service before your returns are filed. They then match the information we put on your return to what they already have on file.

If what we put on your return matches what they have, then your return will receive a lower grade. If it doesn’t, it will receive a higher grade.

If the grade is high enough, you will probably be audited.

It’s not this simple. There are many other factors that go into the equation, but this is the main gist of the process.

As long as we complete your returns based on what the Service already has on file, everything normally goes smoothly. This is one of the reasons why I haven’t had one of my returns audited at the Federal Level in the past twelve years.

Let me leave you with this.

I’m writing this column to deal with an annual phenomenon which is as common as the Spring rains. It has to do with Investment Houses sending out 1099’s that were completed incorrectly.

If you did something with your investments, like a non-taxable rollover, the information we get from your investment advisor tells us and the government whether or not it was a taxable event. By definition, if we don’t want to go through an audit, we are required to report that transaction as taxable, if the paperwork we receive says that it is.

When the client gets their income tax return and they have to pay taxes on the transaction, who do they call? That’s right. You guessed it. We get the call.

When we explain that the documentation we were given was incorrect, and that it must be corrected prior to filing the return, who do you think they call next? Of course, they call the investment house.

By definition, this is a rather uninformed move. Afterall, it was the investment house that cocked everything up in the first place. So they call their broker, or the 800 number, and what do you think happens?

Do you think that these people tell them the truth, or do you think they say whatever it takes for them to not lose the client. These people work on commission, after all.

Most of the time, these commissioned salespeople will say that the accountants should know better than to make it taxable in the first place. Sometimes, they’ll even infer that what’s reported on the forms doesn’t actually matter.

This is, of course, nothing more than a lie to keep the commissions flowing.

Please understand that if my company was dumb enough to do this, we’d probably end up in at least a couple of audits every year that were completely unnecessary. But knowing how the system works, we make sure to get the forms corrected before filing the returns.

This is done for your protection and for my sanity. Trying to tell us how to do our job, based on the “Tax Knowledge” of a commissioned salesperson, is probably not the right way to go.

If you’re frustrated, I’m sorry. Please realize that we didn’t create this problem in the first place. If you want to be unhappy with someone, call your broker.

If we ask you to get something corrected, then take the time to do it right. We’re only trying to do the job you hired us to do. And what is that job?

It’s to protect you, your family, and your business. We would never put you in a position that was dangerous based on the tax knowledge of a commissioned salesperson.

We’re all going to get through this. Let’s get through it together.

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Sincerely yours,

Chris Amundson


Accounting Solutions Ltd.



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