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Posts Tagged ‘Audits’

Im only 20 and my auntie said she paid some company 300 to file her taxes and i told her its free through turbo tax and she said the company she went through protects you against audits. What in the world, so if i turbo tax my taxes every year they can come after me for no reason??? Im highly confused.

With the tax clock ticking down lots of people are finishing up their tax returns. A common question that comes up during this joyous time of year is, “How can I avoid an audit?” Fortunately for most taxpayers the question is far more common than an actual audit. Only around 1% of all taxpayers actually end up facing an audit.
Comforting as that fact is, it is in no way instructive. Knowing what is more likely to trigger an audit can go a long way to avoiding one. Avoiding these triggers will not guarantee that an audit will not occur but it will reduce the chances of one. While all of the reasons that the IRS launches an audit aren’t known, crunching the statistics of past audits does demonstrate some clear triggers.
High deductions – Any deduction that is proportionally high to the taxpayer’s income usually constitutes a red flag. Determining what’s high is the trick here. The IRS publishes an annual book, “Statistics of Income.” Although the book gives ranges for typical incomes some logic needs to be applied. If a taxpayer is at the lower end of a particular income range but claims the upper limits of deductions associated with that range then that deduction may still trigger an audit review even though the deduction is technically within the accepted limit.
High Income – Although a higher income should be considered an advantage under any other circumstance, considered from the perspective of prospective audits it is most certainly a disadvantage. And the chances of an audit jump up significantly with each income level. Past audits tell us that the chances of an audit for taxpayers making less than $100,000 is 0.93%. For incomes over $100,000 the chances jump to 1.77%, over $200,000 brings the odds up to 2.87% and over $1 million in income brings the chances of an audit to a whopping 9.37%!
Cash Income – Any profession that deals with a lot of cash, such as waiting tables, tends to spark the curiosity of IRS audit agents. One of the first things they compare in cases such as this is bank deposits vs. claimed income.
Self-Employment – Because self employed taxpayers are constantly keeping an eye on their bottom line they tend to be aggressive at writing off expenses. While there are many legitimate reasons for doing so the IRS likes to verify these deductions.
While these are some of circumstances that may trigger an audit they do not necessarily guarantee one nor will avoiding them remove all possibility of one. The best defense against an audit is to always expect one. Taxpayers should make sure that their deductions are legitimate and reasonable. They should also keep well ordered records and receipts.
However never having to face an audit is certainly the best circumstance. Keeping these triggers in mind can help taxpayers reduce the risks of that happening.

With the internal Revenue Service (IRS) making headlines lately about increasing audits, it is important to do what you can to avoid being audited. Keep in mind that having to pay more money is not the only unpleasant part of an IRS audit. Typically, audits are a time consuming and aggravating process. Being audited by the IRS isn?t like a criminal trial where someone is presumed to be innocent; the burden of proof lies on a taxpayer to prove they are innocent and filed an accurate tax return.

It is important to remember that the IRS computer systems select the returns that are to be audited. No human ever reviews the returns until they are selected for an audit by the computer system that determines returns likely to yield the most money to the government. It makes this decision by reviewing returns for ?red flag? characteristics. Red flag characteristics are those income, deduction, and credit types that have historically seen the most imprecise calculations and abuse by taxpayers.

A taxpayer is more likely to get audited if he or she generates income from any source other than regular employment wages. Statistics show that someone who files Form 1099 are up to three times more likely to receive an audit then a person who only files Form 1040. A 1997 IRS press release claimed more then three percent of taxpayers filing Form 1099 reporting between $25,000 and $50,000 of income were audited, compared with under one percent of 1040 returns that were audited.

The IRS offers hundreds of possible deductions and credits to help taxpayers lower their income tax liability, but taking an excessively large amount will send a very clear red flag to the IRS. But how does a taxpayer know what?s excessive? That is a tricky question to answer as there is no all-applying rule because the IRS determines the allowable number of deductions for a taxpayer mostly based on their income.

Although there are many tax laws allowing self-employed individuals to lower their liabilities by using home office deductions, taxpayers taking home office deductions are probably the most frequently contested by IRS because they are easy for a taxpayer to bend the truth on. In order to claim a home office deduction, a taxpayer?s home office must be the principal place of business This means they perform most of their work in the home office. Also, the space must be used exclusively for running the business and not for personal use as well. Otherwise the space cannot be considered a home office and may not be deducted.

Losses from a business can also be another red flag for the IRS. If an individual starts their own businesses for the purpose of generating excessive tax deductions, the IRS will catch on quickly. Businesses must be profitable in at least three of the past five years in order to be considered a legitimate business for tax purposes. Otherwise the IRS will realize the business is functioning as a tax shelter.

If there are big inconsistencies between your previous tax returns and your current return then you could be sending a red flag to the IRS. The most common examples are name changes (i.e. your name or the name of one of your dependents), claiming new deductions and credits, or a significant change in income. For example, if a taxpayer earned $75,000 one year, then only $15,000 the next, the IRS is going to wonder what happened.

If there are differences in the income you reported to your state treasury and to the IRS, then the IRS will investigate as to why the information reported is inconsistent. Not only do federal and state authorities receive records of all sources of income and financial information for every taxpayer ? the IRS does as well. If they notice any errors that point to misrepresentation of income then you can expect to receive a letter informing you of an audit.

If your tax returns are incomplete or sloppily prepared then this might also get the attention of the IRS. If there are blanks where there should be numbers or if most of the numbers you claim are round numbers (like $2,500 or $10,000) then this will also send up a red flag to the IRS.

Someone told me that “audits” are usually reserved for those who have very very suspicious income exclusions and are usually for those making at least $35K per year.
Any truth?

Are IRS audits really on the rise? YES!

Here are a few highlights from the IRS’s audit activities in 2007:

For the first time since 1998, the percentage of individual tax return audits was higher than one percent. Audits of S corporations and partnerships increased. 1 out of 11 millionaires faced an audit in 2007.

What is triggering this increase in audits?

The IRS is under great pressure from Congress to show results in closing the $300 billion tax gap, the difference between what taxpayers owe and what they pay. The IRS reported that enforcement and examination revenue totaled more than $55 billion in 2007, up from roughly $45 billion in 2006.

Audits of Individual Tax Returns:

Audits of all individuals across all income levels increased in 2007. The IRS reported that the total number of individual returns audited in 2007 was 1.38 million compared to 1.29 million in 2006.

Audits of “High Income” Individuals:

The IRS considers “high income” individuals to be those who have “Total Positive Income” (TPI) of $100,000 or more. Generally, TPI is calculated by using only positive income values from specific income fields on the tax return and treats losses as zero. This is important for those with real estate losses!

Example:

You file a return showing wages of $80,000, interest of $10,000, business income of $40,000, and a $35,000 loss from rental real estate. Your net income is then $95,000. However, your TPI is $130,000, so your return is considered a high income tax return by the IRS.

The IRS audited 293,188 of these returns in 2007, up nearly 14 percent from 2006.

The IRS also audited more individuals with incomes above $200,000 in 2007 than in 2006. Audits of individuals with incomes over $200,000 reached 113,105 returns, reflecting an increase of nearly 30 percent from 2006!

Audits of Millionaires:

Audits of individuals with incomes of $1 million or more increased 84 percent from 2006 to 2007. More than 30,000 millionaires were audited in 2007 compared to 17,000 in 2006.

Audits of Businesses:

The IRS took special interest in two popular business entities: S corporations and partnerships. Audits of both entities were up in 2007 compared to 2006 by roughly 25 percent.

With the tax gap as large as it is, the IRS is likely to keep up this new pace. Are you prepared?

By, Jones & Ryan

Dealing with the IRS and related tax problems can be anyone’s worst nightmare. Once the IRS has begun to go after you, it can seem that they won’t stop even after you think they have gotten what they want. The tax lawyers of Jones & Ryan have been working since 1995 to solve such nightmares. Grey W. Jones, Esq. and Cheryl L. Ryan, Esq. are tax attorneys with extensive knowledge in tax law and today want to answer some of your common tax questions for free. Below you will find four answers to common tax and IRS related questions. If you wish to find more in-depth answers and get more tax help our website offers an extensive frequently asked tax questions section that we are constantly updating, as well as, a simple tax help questionnaire to start a free initial consultation with our tax lawyers.

Why did the IRS file a tax lien against me? A tax lien, usually filed with your county recorder, serves as notice to those who may loan you money (home or car loan, bank loan, credit card advances, etc.) that once the lien is filed, the IRS? claim against you for taxes will come before those of anyone loaning you money after the filing. With certain exceptions it attaches to all property, real and personal, tangible and intangible, in which you have an interest, wherever the property may be located. A lien does not result in the actual seizure of any property, real estate or other forms. Further, before the IRS can file a lien against your property, it should give you 30-day notification that it intends to do so. This may give you time to make a payment or other arrangements.Can the IRS levy on my house? On my wages? On my bank accounts? What about retirement funds?

A levy usually means the property is actually seized by the IRS. In the case of real estate, it means the IRS can force a sale of the property and keep the proceeds up to the amount of taxes, penalties and interest owed. A certain portion of wages and commissions are exempt from levy; the amount depends on a number of factors, including the number of dependents. All forms of bank accounts?savings, checking and CDs?are subject to a levy in full. In order to catch subsequent deposits, the IRS must serve a new levy on the bank. Once wages are levied upon, the same levy reaches all subsequent wages, commissions, bonuses, etc. No forms of retirement funds are exempt from levy, including social security payments and other forms of government pensions. However, unemployment and workers? compensation benefits are exempt from levy, as are SSI and some forms of public assistance. A small amount of household and personal effects, and tolls and equipment used in the taxpayer?s trade or business, are exempt from levy.The IRS is garnishing my wages. How can I stop them?

The IRS will garnish your wages after proper notice. All the IRS wants is payment or a good reason why you can?t pay. This is when you can negotiate a payment plan or an Offer in Compromise or convince the agency you are worthy of uncollectible status. It is imperative after you receive a notice of ?Intent to Levy? that you deal with it immediately. Intents to Levy are time-sensitive and if you miss your deadline to reply, i.e. make payment arrangements, your employer will be made aware of the situation and your wages may be garnished. If you?re not sure how to go about this, consult a qualified tax attorney to assist you.When is the right time to consult an attorney?

There are various reasons you would need to consult an attorney such as: fraud investigation, a long audit or one that involves legal issues, inadequate books/records, not filing returns for a number of years, if you don?t actually owe taxes, if the statute of limitations has run out or if you would feel more comfortable dealing with the IRS through an attorney. Whatever the reason, don?t hesitate to contact an experienced tax attorney to help you through your foray into the wide world of IRS red tape. Many law firms including Jones & Ryan offer free initial consultations to better understand your situation and decide how they can help. The Jones and Ryan Tax Attorney website offers an extensive frequently asked tax questions and answers page. You will also find free tax articles as well as information about our lawyers, firm, initial free consultation, and how to get in contact with us.

Product Description
If you’ve answered “yes” to any of these questions, you’re not alone: more than twenty-five million taxpayers are faced with the terrifying prospect of dealing with audits, assessments, or other IRS problems every year. But with all the books devoted to how to prepare your taxes, there’s never been one that explains how to get yourself out of trouble easily, legally, and inexpensively — until now. With The IRS Problem Solver, veteran tax expert Dan Pilla offers the… More >>

The IRS Problem Solver: From Audits to Assessments–How to Solve Your Tax Problems and Keep the IRS Off Your Back Forever

A return can be picked up for audit for many reasons. If the return is not correctly filled up and excess tax relief is claimed, the IRS is bound to take up the issue with the tax payer. Sometimes the information given in the return may not match with the information returns filed by other persons with the IRS.
For instance, information given in the Form W-2 filed with the employer may not tally with the return filed by the employee leading to examination of the employee’s return.
There is a risk management mechanism in place in the tax office with certain objective criteria for selection of returns for audit. The criteria may change from year to year.
Information gathered from the press and the electronic medium may also act as triggers for examinations.
In many cases, the audit is done through correspondence. The tax payer may receive a mail from the IRS asking for certain information or some clarifications. Copies of supporting documentation may also be sought.
The correspondence should never be taken lightly. In simple cases, it may be possible to clarify the matter and examination may be closed and the return accepted. It is not necessary that all audits must lead to creation of fresh demand on the tax payer.
In some cases, the correspondence audit may develop into deeper examination through interviews. The tax payer has a right to seek a date of his convenience. The interview cannot be postponed indefinitely, though.
Another important right is the right to be represented by someone else. The tax payer can appoint a representative who can appear on his behalf.
The authorized representative has to be appointed in writing and only those persons qualified to appear before the IRS such as tax attorneys, certified professional accountants can be appointed. You may refer to Publication 1 “Your Rights as a Taxpayer” of the IRS.
An authorized representative can take away much of your burden. Being well versed with the tax laws and the procedure, he will be able to handle the audit process better.
However, you need to assist him well. The tax proceedings turn on documentary evidence which will need to be provided to the representative. The representative will have the power to file documents and receive documents and make submissions, both oral and written on your behalf.
Sometimes the IRS may like to conduct the examination at the business place or the office of the tax payer. They have powers to do so. It is advisable to guard against such a situation by providing full cooperation to the IRS in respect of details and documentation required by them.
If the interviews at the tax office are properly handled, there may be no need for on the spot visits by the tax man. Publication 1 of the IRS website www.irs.gov gives details on your right as a taxpayer.

Product Description
Written by Bruce Hopkins, the foremost expert on nonprofit law, this is your complete analysis of the procedures and practices of the IRS in its audits of tax-exempt organizations. Practical in presentation, this book offers advice on undergoing audits, details today’s exempt organizations’ issues, and authoritatively examines detailed documentation and citations, as well as numerous case studies, tips, forms, and checklists…. More >>

IRS Audits of Tax-Exempt Organizations: Policies, Practices, and Procedures

The legend of the brutal IRS audit is one we’ve all heard about. Somebody will one up by mentioning the friend of a friend who was audited two years in a row! So, is there any truth to this? How often can the IRS audit you?

The IRS uses tax audits for a couple of reasons. The first is simple. The IRS estimates there is a $345 billion dollar tax gap every year. This means we, the taxpayers, are shorting the agency on this amount. The tax audit is designed to try to close that gap. This is done by making individuals and businesses prove their deductions and such.

The second purpose of the tax audit is to “motivate” taxpayers to comply with the tax rules. Frankly, the IRS is happy you and I are terrified at the prospects of being audited. Why? Because we are much more likely to pay every penny we owe each year. Put another way, fear equals revenues!

Regardless of the purpose, is it true the IRS can audit you two years in a row? Unfortunately, the answer is yes. In fact, the agency can do it three, four and five years in a row. At this point, even the IRS will invoke a mercy rule. It has announced it will not audit a taxpayer on the same issue five years in a row. Of course, it could look at something else!

Isn’t that great news? Well, not really. Can you imagine being audited FIVE YEARS in a row. It is hard to imagine things getting much worse than that. While the IRS might let you go after five years, it is hard to imagine a scenario where you would come out in good shape. Even if you ended up owing nothing, you’re nerves would be frazzled beyond belief!