Most taxpayers have a fear of being audited by the IRS. I was inclined to say they have a “healthy fear,” but that is not always the case, as some live in dread of being audited by the IRS. Admittedly, there are instances of IRS abuse in this area, and we should be aware of the potential for abuse. However, audits have changed from in the past. In 2014, 71 percent of all audits were conducted by correspondence. Many of the remaining 29 percent were onsite audits of businesses. The days of individuals making a trek to the local IRS office are disappearing.
Additionally, the number of audits in total is decreasing due to budget cuts within the IRS. There are 28 percent fewer collection officers than in the past and collections from audits has declined seven percent since 2011.
Your chances of being audited are slim. For 2014, .86 percent of individual returns were audited. On returns showing income in excess of $1,000,000 7.5 percent were audited. If you included a Schedule C on your return, your chances of audit increase slightly as the income shown on the return increases. Claiming of the earned income credit will increase your chance of audit, as this is an area in which a great deal of fraud has occurred.
Most “audits” today are as a result of the document matching capabilities of the IRS. If you fail to include a W-2 or 1099 on your return, you will get a Form CP-2000, proposing a change in your taxes due. In many cases, these amounts due are calculated with incomplete information, so you should review them to determine their correctness. For example, one individual of moderate income received a CP-2000 for over $25,000 and was in a panic. Upon examination, it was determined that the taxpayer sold some stock and failed to report it on their return because they did not make a profit. The IRS took the gross proceeds from the sale and calculated additional tax on that amount without reducing the taxpayer’s cost basis in the stock. In another instance, the taxpayer properly rounded the amount of a 1099-INT. However, the IRS truncated the amount. Since the two were $1 off, they didn’t match and the taxpayer got a CP-2000 along with a bill for additional tax. In these cases, a simple explanation to the IRS usually is sufficient to cancel all or most of the additional tax.
If all income is reported on your return and your deductions are legitimate and provable, you should not omit taking any deductions simply out of the fear of an audit. Take the deduction, but be able to prove you are correct, and pay less tax. Yes, it can be a hassle to get it straight, but if you’re in the right you should prevail. And who wants to pay too much tax?
But where should you be extra vigilant? There appears to be four areas of emphasis for the IRS in auditing returns in the current year,
1.Cash businesses. The tax gap from these businesses is tremendous, so the IRS is attempting to reduce the gap through audits and other methods.
2.Alimony is deductible to the individual paying it and income to the recipient. When alimony is paid, the taxpayer is required to provide the social security number of the recipient. Incredibly, there is a gap of $2.3 million dollars in deducted alimony and taxable alimony.
3.Business Audits. The IRS want to do more here. Ninety-four percent of small businesses using computer software use QuickBooks. The IRS would like very much to examine your QuickBooks files, but they do not have money in the budget to update their QB versions, so they cannot accept electronic files from businesses they are auditing.
4.Education credits. The Treasury Inspector General for Tax Affairs has found a tremendous discrepancy in the amount of education credits claimed and ones that are legitimate. The IRS is now requesting proof of payments for education purposes, and the 1098-T only contains limited information in this regard.
5.In a related vein, the IRS is auditing Form 1099-Q (Payments from Qualified Education Program). Some recommend providing the IRS with proof of amounts paid when filing the return so the IRS does not treat these as taxable income.
As long as we have a complex income tax system in the United States, there will be attempts to illegally reduce one’s tax liability. As a result, there will be tax audits. Good record-keeping can go a long way to reduce the stress and cost of an IRS audit. And, of course, filing a return with legitimate deductions will help too. But you should file a legitimate return with all income and deductions included.
Dr. John Stancil (My Bald CPA) is Professor Emeritus of Accounting and Tax at Florida Southern College in Lakeland, FL. He is a CPA, CMA, and CFM and passed all exams on the first attempt. He holds a DBA from the University of Memphis and the MBA from the University of Georgia. He has maintained a CPA practice since 1979 with an emphasis in taxation. His areas of expertise include church and clergy tax issues and the foreign earned income credit. He prepares all types of returns, individual and business.
Dr. Stancil has written for the Polk County Business Journal and has presented a number of papers at academic conferences. He wrote the Instructor’s Manual for the 13th edition of Horngren’s Cost Accounting. He is published in the Global Sustainability as a Business Imperative, Green Issues and Debates, The Encyclopedia of Business in Today’s World, The Palmetto Business Review, The CPA Journal, and in the NATP TaxPro Journal. His paper, “Building Sustainability into the Tax Code” was recognized as the outstanding accounting paper at the annual meeting of the South East InfORMS. He wrote a book entitled “Tax Issues Faced by U. S. Missionary Personnel Abroad ” that will soon be published.
He has recently launched a new endeavor, Church Tax Solutions, which presents online, on demand seminars on various church and clergy tax issues.
1 comment on “IRS Audits – What Are My Chances?”
We have seen an increase in audits recenty, largely directed at individuals with high mileage for business. They also seem to be targeting specific industries like home health care in which there is a lot of contract labor (independent contractors) to see if they can charge them for the tax as if these were all W-2 even when they are legitimately contractors. And some of the auditors do not have any idea of how businesses actually work, to the extent that in a recent audit the auditor did not allow the deduction for state and federal unemployment payments by the company when those were documented by ADP on payroll reports.
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