Recent numbers released by TRAC, a non-profit research center at Syracuse University, showed that the Service audited taxpayers earning less than $25,000 five times more often than everyone else. The majority of those audits focused on taxpayers claiming the Earned Income Tax Credit.
At first blush, a reasonable person might say how unreasonable this is. Why would the IRS audit 13 out of every 1,000 returns claiming the credit when the normal percentage is 2.6 out of every 1,000?
This is wholly unacceptable and completely unfair. Or is it?
Take a step back and think. Why would the service target the poorest of taxpayers?
Even if they did establish a liability of $5K or $10K, how would they ever collect? Wouldn’t it be smarter for them to target middle income taxpayers or the upper class, so they’d have a chance at getting paid for their work?
The first thing you need to know about auditing is there’s no such thing as a random audit. They don’t exist. The departments don’t have the manpower to waste.
If you’re one of my readers rather than a client who’s in an audit, and the auditor told you that it was random, don’t believe the malarky. You were targeted.
Audit managers who approve audits won’t send out an auditor if they don’t believe that the person’s time will be paid for. So why would the IRS target these poor earned income tax credit tax filers?
Because most of them have cash jobs on the side where they aren’t reporting their income and are guilty of income tax evasion.
Decades ago, when my practice was still small and getting started, I used to do off-the-street 1040’s. I remember one instance where a family of six came in to do their return.
The father handed me a W-2 with $5K of income on it and $400 withheld in federal withholding. I asked if this was all of the income for the family, and was reassured, absolutely, that this was all of their earnings for the year.
Now take a moment and think about it. There’s no way that anyone is going to feed a family of six in Chicago on $5K. I’m sure that both the mother and the father had jobs where they were paid cash on the side that they weren’t claiming.
I professionally asked the family to get the hell out of my building.
If I’d done that return, after the child tax credit and the earned income credit, they would have received a refund check of $6K. Only $400 was withheld, but with the refundable credits they would have received another $5,600 in refund.
Ever wonder why the quickie income tax franchises sprout up on every other street corner in Chicago’s poorest neighborhoods only from January 1st to April 15th? This is exactly why.
The not so poorest-of-the-poor are scamming the system.
In this instance, the IRS is simply doing its job. They’re not going to audit anyone where they don’t know of something wrong happening in the first place.
If anything, they should do a lot more auditing in this category.
Let me leave you with this.
The easiest way you can avoid audits altogether is by hiring a competent accountant and not breaking the law. People always talk about being afraid of the IRS.
Why would you have anything to fear if you’re not doing anything wrong?
One of the things you may not know is that whether or not a return is audited in many instances has everything to do with who signs the return. At the national level, self-prepared returns are audited three times more often than returns prepared by professionals. And by professional, I don’t mean the quickie income tax prep places.
When the audit managers are choosing audit targets, they’re going to do a search in their system on the preparer. If they see that the last five audits they did on a particular preparer’s work ended in a no change letter, they’re going to think twice about targeting that taxpayer.
I haven’t had to defend an audit on one of my returns at the federal level in eleven years. Think about that.
Most of my clients are perfect audit targets and they leave my stuff alone. Why? Because we do work at the highest possible level and there’s no money for them to get on our stuff. They’re not going to waste their resources.
If it isn’t right in the first place, I’m not going to sign it. Because of that, my clients have nothing to fear.
If you’re having problems sleeping at night because your accountant is inferior, please give us a call. We’d love to help.
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