Filing taxes is punishment enough without the vague threat of an IRS audit looming over our heads. For understandable reasons, the IRS insists on keeping the ins and outs of its auditing process on the murky side. After all how will the IRS catch the bad guys if you give them the rule book first?
But because of the sense of mystery around the process, it’s an area of regulation often misunderstood by taxpayers.
Here are a few common myths about the dreaded tax audit:
Myth #1: Only the wealthy get audited.
While it’s true that big businesses and the uber-rich are often targets of IRS tax probes, that doesn’t necessarily mean low- and middle-income workers are free and clear. The IRS is increasingly relying on data mining and robo-audit systems to detect errors in tax returns, which has actually made it easier to go after small-fish taxpayers.
In 2013, the IRS audited more than 6.5 million taxpayers with an adjusted gross income of less than $1 million. And it audited fewer than 40,000 of those reporting $1 million or more.
One of the biggest reasons behind that discrepancy is that it just takes fewer resources to audit low- and middle-income earners than to audit high-income earners. For example, the IRS has effectively moved to pursue people who fraudulently claim the Earned Income Tax Credit (EITC), a juicy tax break worth an average $5,891 for a family of five earning less than $50,270 a year. In 2012 alone, EITC fraud cost the government between $11.6 billion and $13.6 billion.
Myth #2: An audit means you’ll have an IRS agent knocking down your door.
Of the 6.5 million audits conducted last year, only 362,500, or 5.5%, resulted in an actual field visit. If your return is flagged, you’ll most likely get a letter in the mail notifying you that your tax return has been selected for examination or seeking additional information. From there, you can either answer by return mail or call them directly.
Now when IRS agents do come knocking on your door, they usually are Special Agents from the Criminal Investigation Division. Here there is no civil tax audit. These are the agents with guns and badges who seek out taxpayers that the IRS believes should be charged with tax crimes and prosecuted. Don’t be fooled by their civility. Refrain from communicating with them until you first seek tax counsel.
Myth #3: I’ve got my tax refund so I don’t have to worry about an audit.
Even if your tax return was accepted and you cashed your refund check, you’re still fair game for auditors. The IRS actually has up to three years to go after questionable tax returns and in some cases this can be extended to six years or indefinitely.
The IRS uses a special matching system that tracks each taxpayer’s W-2s, 1099s and 1040 forms. If it turns out that you’ve under-reported your income, the system will eventually catch up to you.
The IRS will also “score” your tax return adding points for the tax credits and deductions you claim including the Home Office Deduction, Real Estate Activity Losses, Unreimbursed Employee Business Expenses, Charitable Contributions and Business Expenses for the Self-Employed. The more you claim, the higher your score and the chance you are selected for audit.
And that’s not even the worst part. Any interest and penalties owed on your unpaid taxes will start accruing the day your taxes were due — not two years later when the IRS letter finally shows up in your mailbox. Two years of compounding interest and penalty charges will only add salt to the wound.
What Should You Do?
If you receive notice that your tax returns are to be audited or there is a knock on your door by IRS Special Agents, do not try and take this matter on your own. Instead, enlist the services of a qualified tax attorney at the Law Offices Of Jeffrey B. Kahn, P.C. with offices in Los Angeles, San Diego, San Francisco and elsewhere in California to resolve these inquiries.
Description: Working with a tax attorney lawyer is the best way to assure that your freedom is protected and to minimize any additional amount you may owe to the IRS.