We began our discussion last Friday by talking about how they choose businesses to examine. Today we’ll discuss Personal Income Tax Returns.
1040 Audits
Please understand that the IRS gets a copy of just about everything that goes into your Federal and State Personal Returns. They have files segregated by filing year and Social Security number that contain copies of your W-2’s, 1099’s, 1098’s and almost everything else.
So when they receive a copy of your return, they check it against what they already have in your files for that year. The return is then graded.
If everything matches then there aren’t any problems. When items don’t match, they are electronically flagged.
Then, based on the number of flags, its graded appropriately and sent to an Agent so that a decision can be made about how to proceed. Those decisions include…
1 – Letting It Pass
If what’s missing doesn’t change any tax that’s due, then there’s no reason to take any action.
2 – Sending Out A Change Letter
In this instance, the Service will send out a letter notifying the taxpayer of the change in question. It will also change the tax due, and assess interest as well as penalty.
If the taxpayer agrees with the change, they then have thirty days to pay the bill before additional interest and penalties begin to accrue. If they don’t agree, they have thirty days to write a denial letter and provide the evidence necessary to support the denial.
3 – Auditing The Return
If the return is missing enough information so that it justifies the time and money involved in a full examination, then an audit will be ordered. At that point, the taxpayer must provide documents and answer questions on the portions of the return that are at issue.
Audits normally come in a couple of different categories. The first is one where they’re simply seeking a payment.
In this one, the evidence they have may not be clear enough to just send out a correspondence audit assessing a balance due. As such, an auditor might be necessary to handle the change.
In the second, they might be seeking a criminal charge. If they can prove potential Income Tax Evasion based on their documentation, they will certainly conduct a complete audit before recommending jail time and assessing any additional taxes.
Let me leave you with this…
Given these examples, there are two ways to not end up in an audit.
1 – Get The Return Right
This should be self-explanatory. The first thing we need to do is make sure that everything is included in your return.
We accomplish this through a tax organizer. These are basically a list a questions that ask a taxpayer about everything that could possibly be considered income and everything that is deductible on a return.
It’s easy for people to forget about something that happened almost a year ago. Although the process can be annoying, it goes a long way to making sure that we haven’t missed anything.
The next part of getting it right is to go to a taxation professional who actually knows what they’re doing. Tax law is neither fair nor reasonable. It defies logic at every turn.
Trying to do a return yourself adds a risk that no one should be willing to take. Please understand that ignorance of the law has never been a defense.
They’ll put you in the slammer whether you knew you were breaking the law or not.
2 – Don’t Electronically File
When I had the audacity to make this suggestion last Friday, I received numerous hostile emails from techno-wizzes who called me everything from a moron to a dinosaur. Please allow me to teach you something that your Daddies should have explained back when you were still knee-high to a Grasshopper.
Just because it’s new and electronic doesn’t make it better. Sometimes the old ways are actually better.
Let’s remember that the IRS only began allowing electronic filing because they didn’t want to pay someone to take your paper return and enter it into their system so that it could be checked in the first place.
By electronically filing your return, you’re just making it easier for the IRS to check it and select you for examination. The easiest way to not get audited in these Great United States of America is to invest in a $.76 cent stamp.
My nay-sayers are now saying something like, but they’ll put that information into the system anyway. Mailing in a return shouldn’t make a difference.
To that I simply say nay. nay.
With the budget cuts the Service has gone through in the past couple of decades, many times they don’t have the manpower necessary to complete this task. The IRS actually sent out a communication several months ago admitting to destroying 20M information returns that they just couldn’t get into their system so that returns could be checked.
Probably, another portion of my readership is now saying that electronic filing is mandated, which it is. If you’re a paid preparer that completes more than 10 returns annually you’re required to electronically file, but there’s an exception.
If any of my clients sign a letter instructing me to not electronically file because
paper is their preference, then the return can be mailed. And the majority of my clients sign the letter.
As such, I haven’t had one of my returns audited at the Federal Level in the past twelve years. That’s really saying something.
Most of my clients aren’t Dick and Jane down the street where he’s a Policeman and she’s a Teacher. Please realize that most of my clients are perfect entrepreneurial audit targets.
Many accountants don’t agree with me because they actually want their clients to be audited. They’ll take your numbers, put them on a return, make sure that it is so ridiculously aggressive that most of it will red flag, and electronically file it hoping for an audit letter.
Why?
Because they can then charge you $10K to $20K to get you out of trouble. For those accountants, it’s just good business.
But I’ve always taken my oath of office more seriously than most. I’m in business to help my clients, not myself.
Here, we follow the Golden Rule by serving in the manner in which we’d like to be served.
This is my second column in a series devoted to how not to get audited.
As always, if you find yourself in a difficult accounting and tax situation, we’d love to help. Please contact us today.
We’re all going to get through this. Let’s get through it together.
Accounting Solutions Ltd. stands ready to complete our mission and purpose of protecting you, your family, and your business. Whether you need Payroll Services, or Accounting and Tax Work, you have but to ask. I’m here and I remain,
Sincerely yours,
Chris Amundson
President
Accounting Solutions Ltd.
773-267-7500
888-310-0300
www.AccountingSolutionsLtd.com
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