Fewer Audits in 2012?
Why the drop in IRS audits doesn't necessarily mean you're “safe”
A recent article appearing in USA Today reported that the number of IRS audits performed in 2012 is likely to be lower than in previous years, and the overall rate of audited tax returns may even fall below 1%—something that hasn't happened since 2006.
There are several factors involved in the reduced numbers of audits, including:
- Federal budget cuts
- An IRS hiring freeze
- Staffing reductions
- The increasing complexity of the tax code
- A rise in tax refund identity fraud
The shifting focus of auditing targets
While the overall number of IRS audits plateaued at approximately 1.1% for 2010 and 2011, the focus of audits has changed. For example, there are now more audits conducted on the wealthy—specifically, those who earn $5 million or more annually.
Another area that's seen a shift is random versus targeted audits. In recent years, the IRS has moved away from selecting tax returns at random to audit, and concentrated more on those returns that raise red flags.
What this means for you
It's easy to conclude that fewer audits overall means that you’re less likely to be targeted. However, if your tax returns seem suspicious to the IRS, you may actually have a greater chance of receiving the dreaded audit notice.
Placing greater attention on targeted audits has allowed the IRS to substantially increase its collections. Since the strategy is working, they aren't likely to abandon it and return to more random audits anytime soon.
How to protect yourself
To reduce your chances of being audited, ensure that your tax returns are filled out as thoroughly and honestly as possible. Also pay close attention to these several items that act as alarm bells to the IRS:
- Schedule C: The IRS tends to focus on sole proprietor business returns with income and expense figures that diverge greatly from similar businesses—either much higher, or much lower.
- High deductions: If you're claiming huge charitable donations, or deductions that are significantly higher than others in your income bracket, the IRS may be prompted to sniff around your records.
- Business vs. hobby: If you have multiple sources of income and one of them could qualify as a hobby, beware that the IRS may become suspicious and try to downgrade your secondary business to hobby status—which happens through an audit.
- Home office: Claiming a portion of your home as a dedicated business office is often seen as an immediate red flag. The small deduction you receive in return for this claim may not be worth the risk of attracting an audit.
- Earned income credit: In recent years, the IRS has cracked down on EIC filers, taking a closer look at most claims. This is due to a rise in EIC fraud. If you're claiming dependents on your tax returns, make sure you have the absolute right to do so.
No one wants to be audited. But ultimately, if you do receive an audit notice from the IRS, it's in your best interests to retain a professional tax resolution firm to help you through the process. To have someone from our A+ BBB Rated staff contact you, please fill out the form to the right or feel free to call us 24 hours a day, 7 days a week at 888-411-5389 (LEVY).
"You want a LEVY on your side, not one against you!"
10 tips for getting through a Tax Audit
When it comes to taxes, there's nothing worse than the idea of being audited. While some are at higher risk than others, anyone can be targeted for a review by the IRS. The average taxpayer has a 1 in 200 chance of being singled out for an audit.
So what can you do if you receive that dreaded notice? In nearly every case, it's best to consult with a tax professional. Here are some more tips to help you prepare:
- Don't ignore an audit notice. If you receive one, you're usually given 30 days to respond—and if the IRS doesn't receive a response, they can simply adjust your tax liability and send you a bill.
- Read the notice carefully. An audit notice details the items that the IRS intends to examine. This is information you'll need when you report to the audit.
- Get organized. It's generally in your best interests to make the auditor's job easier by having your records in order. Group the items listed on the audit notice for fast access, and arrange things logically by date.
- Obtain copies of any missing records. Keep in mind that it's your responsibility to prove your deductions, not the auditor's. If you have taken deductions that you can't prove, your returns will be adjusted accordingly.
- Bring only the records that are being examined. An auditor may decide to ask about items that weren't originally covered in the audit notice. If you don't have that material with you, in most cases the auditor won't press the issue further.
- Don't be difficult. Contrary to popular belief, IRS auditors are actually people. If you treat the auditor politely and resist the urge to unload your frustrations, the audit process will be far smoother. Auditors are generally willing to cooperate and provide guidance—if they’re treated courteously during the process.
- Provide copies, not originals. The IRS is not responsible for lost or misplaced documents, and if you give your original documents to the auditor, you'll no longer have records of your deductions.
- Stay focused on the audit. IRS agents are professionals, and may draw out questionable statements in what seems like friendly conversation—especially regarding your assets or recent financial activities. It's best to answer all questions in a straightforward manner, if possible with a simple “yes” or “no.”
- Don't be afraid to say no (politely). If an auditor asks about items or records that you firmly believe have no foundation for examination, feel free to turn down the request, especially if the item wasn't covered on the original audit notice.
- Know your rights. Familiarize yourself with the tax laws that apply to you, as well as the actual audit process. This also helps you to appear knowledgeable, earning you respect from the auditor.
Again, it's best to enlist the services of a tax professional if you're being audited—but you should still be prepared ahead of time. Knowing what to expect from a tax audit increases the chances that you'll emerge from the process relatively unscathed.
If you are being audited or have questions regarding an audit, call 888-411-5389 (LEVY) or fill out the form to the right an someone from our A+ BBB Rated staff will contact you shortly.