13,000 People Are Getting A Surprise Audit!

13,000 lucky Americans will soon receive letters from the IRS explaining that they’ve been selected for a random audit. The hapless participants are rounded up as part of the IRS’ National Research Program, which seeks to explain why the Treasury receives $300 billion less than we Americans collectively owe. A random audit is nothing to fear unless you are a tax cheating yutz.

Alpha Consumer explains:

You can’t reduce your chances of a random audit. But for audits in general, there’s a lot of stuff you can do.

For a normal tax return, file an accurate return, and most of the time you won’t get audited. Get a reputable return preparer. If someone says, “Don’t worry, you won’t get audited if your expenses are below this amount,” that is probably not someone you want to work with. Keep records. If you have any cash transactions, keep records. If you make a mistake, and you discover it, you can file an amended return before any audit starts. If you make a mistake, it is just that most of the time. But if you go into a return thinking, “Maybe the IRS won’t catch me,” and you don’t report 10 or 20 percent [of your income], that’s not the way to do it if you want to avoid an audit or more than an audit later.

In general, small-business owners and self-employed people have a much larger likelihood of getting audited, because W-2 wage earners have taxes withheld from their returns.

Other “stuff” that may pop you out of a computer and trigger an audit includes a situation where you have $50,000 in income and have reported losses of $100,000, wiping out all the income reported. Or, a taxpayer showing $60,000 in income with a $45,000 mortgage [deduction] may get you an audit.

For those who escaped this round of audits by filing an extension, don’t forget that your tax return is due tomorrow – and don’t forget to claim the telephone excise refund!

How to Avoid Getting Audited by the IRS [Alpha Consumer]
(Photo: AFP/Getty Images)

Comments

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  1. Adam291 says:

    $300 billion in personal income taxes? I find that hard to believe. Maybe if that included business and multinationals who use the Cayman Islands and Switzerland to hide their money.

    Whatever it is, we could use that $300 billion about now.

  2. I wish I had $300 billion…

  3. Galls says:

    do said people include corporations?

  4. Falconfire says:

    I was going to say… way to make even a slight bit of sense here IRS… lets find out why so many people are cheating the system by pissing off the people who actually paid their taxes.

  5. louisb3 says:

    Is the audit totally random, or does it target the most profitable demographics, i. e. rich people? The IRS gets a lot more bang for its buck for each wealthy tax-cheater it catches than for each barely-above-poverty cheater.

  6. OnceWasCool says:

    I am assuming the $300 billion is an estimate based on income from sales and services? It’s NOT the tax payers causing the shortage, it those drug traffickers / dealers and other cash only businesses out there.

    The IRS should be renamed DUH !

  7. Sudonum says:

    @louisb3:
    This particular type of audit is completely random. Just 13000 Social Security Numbers that get popped out of the computer.
    @oncewascool:
    I’m not sure how they get the number, but the “$300 billion” is tax money that individuals “avoid” paying by fraudulent deductions, under reporting income, or not reporting cash income. Think how many times a day you go to a store of some kind that, all, or a majority, of their business is cash. My father-in-law used to own a cash register business. The number of cash business transactions is unbelievable. And when purchasing a new cash register or POS system their first question is something along the lines of “This isn’t going to track EVERYTHING, is it?”. They want to keep the employees honest and hide a portion from the IRS.

  8. Chicago7 says:

    Under the Clinton administration, the emphasis was on auditing the wealthier people and corporations. Bush changed that to auditing the middle class.

  9. Chicago7 says:

    I should probably rephrase that. The emphasis was on CORPORATIONS under Clinton, that emphasis has declined under Bush.

    The wealthy get so many tax cuts under Bush that they have no incentive to file a tax return claiming deductions they aren’t entitled to.

  10. Major-General says:

    @Chicago7: Bull.

  11. Chicago7 says:

    You can say bull if you want, but show your work.

    Here’s a link to the tax enforcement of business and its slump under the Bush administration.

    [trac.syr.edu]

    If are unaware of the multiple tax cuts to the wealthy under Bush, then you should read a paper once in a while.

  12. MsClear says:

    My hubby and I are very honest, but this still gives me the willies. Perhaps for no good reason. Fear of the IRS is such a cultural thing in the US.

    Also, it is well documented that Bush has refocused audits away from the rich and on to the middle class. Par for the course for this administration.

  13. Mojosan says:

    Chicago,

    ALL taxpaying Americans got a tax cut. The poorest Americans had their taxes eliminated.

    Please, take your BDS elsewhere and let folks discuss the topic at hand.

  14. Chicago7 says:

    But the majority of the tax cuts were for the wealthy, so you can your “BDS” (whatever that is) elsewhere.

    The topic is audits, which have been drastically cut under Bush for Corporations. The wealthy don’t care that much about audits because they got so many tax cuts. Dividend tax cut, capital gains tax cuts and the reduction of the top tax rate from 39.6% to 35% plus the attempt to eliminate the Inheritance Tax.

  15. Chicago7 says:

    Just because you don’t like the fact that Bush has a hard-on for Corporations and the wealthy doesn’t mean it isn’t true.

  16. pine22 says:

    i totally agree with this, we should randomly audit more people. it makes sense to target wealthier people, but we should not exclude the middle class from audits just because we wouldn’t get the “best bang for our buck”

  17. ogman says:

    The IRS cheats and ignores their own laws, so why shouldn’t taxpayers?

  18. endless says:

    no income tax.

    all sales tax.

    make it fair.

  19. joeonsunset says:

    @Pine22: You agree with this? Did you read the article which suggested that some of the most intrusive random audits will require professional help, which could cost up to $500? It is bad enough that the income tax is so complicated many Americans cannot adequately prepare their own returns, and have to pay professionals to do so. Now, even after they have done this, many Americans will have to pay for assistance AGAIN just to prove they did nothing wrong in the first place.

    @Endless: I agree with you in the concept that our national tax system needs to be made much more simple, and much fairer. (Unfortunatey, sales tax is extremely REGRESSIVE. I.e., the lower wage earners would pay a higher percentage of their income.)

  20. weave says:

    Oh let’s see, chances of getting hit with this are over 1 in 100,000 — the kind of odds that I’d never hit in the lottery or casino. I better get my records together now to get ready. :(

  21. torqueU says:

    @endless:

    How do you keep the wealthy from buying overseas? or people along the border crossing to buy stuff then coming back to the US with their lower cost goodies?? I like the concept, but in practice I think it’ll be difficult.

  22. Anonymous says:

    Hate to say it, but if your expenses are below a certain amount, it does reduce your chances of an audit. The IRS uses very complicated statistical analysis to watch for numbers that are extreme. Does anyone besides the IRS have access to it? Nope. But preparers (good ones) will have a general idea on what is acceptable.

    Case in point: my mother sells stuff online, and the postage expenses that she had were huge, both in dollar amounts and percentage of net. She even had every single receipt. If she had submitted that return with those numbers, she would have had an audit, almost guaranteed. That’s what our tax preparer said at the time, and now that I’m actually doing taxes as a career, it’s absolutely true.

    And never ever EVER lie about your income. Just plain stupid. The IRS will destroy your world over that. “Smart” cheaters cheat on the deductions/expenses side. Smart people don’t cheat on the taxes.

  23. Baz says:

    All I have to say on this one:

    Ron Paul on the IRS – May 2007, Austin, TX

  24. IRSistherootofallevil says:

    “Hello, you’ve been ‘randomly’ selected by the IRS for an audit”
    “I WANT A LAWYER!!!”

    When the IRS finds no fault.

    “Hello, you have been served (for defamation of character).”

  25. IRSistherootofallevil says:

    Oh, I forgot the rest. Slander, libel, blackmail, mail fraud, grand theft larceny, assault, trespassing, racketeering and antitrust violation.

  26. timmus says:

    Oh man, first Digg, now the Ron Paul crowd is over here too.

  27. guroth says:

    Most people don’t understand that the amount of people that fall under the “wealthy” is such an extremely low percent that when you tax the snot out of them it doesn’t make any sense because you are getting such a low amount of money when looking at the big picture.

    If you taxed the “wealthy” 100% of their yearly income then you would have enough money to run the government for something ridiculously low like 3 days.

    So for the people complaining about “tax breaks for the rich” realize that you’re talking about pennies in the pond.

  28. Caswell says:

    You can also feel good about throwing oppressive income tax rates onto the “rich”, but the harsh truth of it is that many (if not most) of them don’t have income in the W-2 sense.

    You can tax the snot out of corporations as well, but all they’re going to do is pass the costs on to the consumer.

    I’m surprised that a pro-consumer blog has commenters that are pro-IRS. Being forced to submit a 1040 every year is the biggest violation of privacy any American is subjected to.

  29. Ben Popken says:

    Audits are necessary.

  30. Baz says:

    But the IRS isn’t necessary…

    Here’s something I’d like to put before the Consumerist crowd – how do we feel about a flat national sales tax (say in the 20% range) in lieu of a personal income tax? Tax people on what they consume instead of what they earn – wouldn’t that naturally encourage a personal attitude of savings and financial responsibility instead of our present culture of “consumption beyond means” and our looming personal debt (credit cards!) crisis?

    I by no means know much about this subject, but it’s something I have been thinking about lately – esp. as a 1099 taxpayer…

  31. Anonymous says:

    I’m curious. How do these random audits work? What legal theory allows the IRS to inspect a private individual’s records at random without probable cause determining that something was misreported?

    What happens if you are contacted and made aware that the IRS would like to audit you but you refuse, and the IRS has no actual evidence of any financial misdeeds on your part?

    I am not a corporation and I don’t go to the trouble of archiving every financial document that might be of benefit to the IRS. If they can’t prove I’m lying, then what can they do?

    Just ignorance on my part. I’d like to know.

  32. supra606 says:

    @Baz: I am all for a system like that which is why I’m voting for Ron Paul in 2008!

  33. Javert says:

    @Baz: The problem with a consumption tax is that it is disproportionate against low income people. If they pay $20 in tax on a $100 item and earn a $1000 a year as opposed to someone who pays the same but earns $10000 a year, it is really not fair. It is a regressive tax rate. Then again a progressive tax system is not fair either. If we had a flat tax of 20% compare someone who earns $50K a year against someon who earns $200K a year…the $50K a year person pays $10K in taxes. The $200K pays $40K in taxes. The higher income person is already taxed more. How is it fair then to, on top of already paying more in (yet receiving the same if not less benefits for the money contributed) to then add a higher rate to the person earning $200K? Why do we punish those who work hard, get educations and earn more with a progressive tax? On top of that, for married couples, this progressive tax can be to the point that it encourages one of the partners to be voluntairly unemployed?

    As for the audits in general, I am in favor of them as the number of people who ‘fudge’ their returns is quite high. It is like back in 86 when the IRS required SS numbers for dependents…7 million people disappeared in the U.S. See [www.freakonomics.com] for more info.

  34. tekkierich says:

    HA! With the IRS you are guilty until proven innocent!

    Government auditing your complete financial picture is the most invasive and repressive thing our Federal Government does. Our current tax code has evolved into nothing less than a top down management of the economy by Washington.

    Check out the only presidential candidate that wants to have real tax reform: Congressman Ron Paul, Republican for president.

  35. hapless says:

    @Javert:

    How is it fair? Marginal utility. Taking 20% of income from a 50k household is quite a different order of suffering from taking 33% out of a 200k household. I would argue that taxes become less burdensome at higher incomes.

  36. Chicago7 says:

    @guroth:

    Then how do you explain the huge deficit racked up by the Bush administration?

  37. Chicago7 says:

    Think about the person making $20k a year and having to pay 20% sales tax on everything.

    Not that a sales tax would work anyway, because the only people who would pay it all of the time would be lower income, because they would be buying staples, such as food and energy. The rest of the people would avoid it by barter and/or an underground economy for a lot of their luxury or unnecessary purchases. And they may just stop buying things, which would probably lead to a global depression. The US economy (and most of the world’s economy) is based on the purchases of the US consumer.

  38. savvy9999 says:

    for the record, that photo accompanying this article rocks.

    I would think that if one used a service (either online (Taxcut, etc) or in person to do their taxes (H&RBlock, etc), that the chances of being audited should be nearly zero? Anyone confirm/deny this?

    The only place I could figure out to add or tweak anything using TaxCut was in the charitable deductions section. Everything else was loaded in automatically from my employer(s). Interest income, deductions for mortgages and student loans, all that gets reported back to the IRS already. Maybe I’m not that smart, but short of making up additional deductions, er kids, how would a rather normal family with standard go-to-work jobs and pay-the-bills lifestyle even start to cheat?

  39. infinitysnake says:

    @louisb3: Sadly, they’re more likely to target middle income families.

  40. Caswell says:

    @Chicago7:

    How do you explain the Bush-era deficits? Easy. It’s not a decrease in tax receipts – that revenue is at record levels.

    The reality is that Bush has spent more than any President since LBJ.

    Neoconservativism is just another form of big government. With the Neocons still in control of the Republican party and the Democrats still holding onto their tax-and-spend ways without the dot-com bubble to prop up the economy we’ll see deficits for years to come no matter who wins in ’08 (assuming Paul continues to be marginalized by the MSM).

  41. infinitysnake says:

    BTW, the most brilliaqnt tax-reform idea I’ve ever seen is the APT tax, which would require neither regressive sales taxes nor income taxes:

    http://www.apttax.com

  42. Chicago7 says:

    The APT tax wouldn’t work. Most of the money would be generated by financial payments and they would just transfer that cost to you with higher fees on your IRAs, 401(k)s, stocks, etc., which would more than offset any savings in taxes. There’s no free lunch.

  43. Tigerman_McCool says:

    Don’t worry about being audited. It’ll never happen. Everybody chill out.

    Signed: Willie Nelson’s Accountant

  44. Anonymous says:

    Darren, i worked for IRS years ago. The random audit used to be called TCMP (Taxpayer Compliance Measurement Program). It is totally random, and every line item is covered. The results of these audits are what they use to come up with the differentials/variables for programming. They need to figure out how much expenses should be for a particular job type/income/etc.

  45. josh42042 says:

    Hopefully they’ll audit the 13,000 richest people.

  46. Baz says:

    @Javert:

    What if the consumption tax was waived on basic necessities and consumer goods – i.e. the goods and products currently eligible for food stamps.

    I see no problem with a rich or poor person paying the same $40 tax on a Nintendo Wii. If basic needs are exempt from the tax, then the tax would encourage households with limited means to budget and conserve, not spend on credit.

    I used to live by the 10th & C housing projects in NYC’s east village – I saw at least 2-3 boxes for large, name brand flat screen tv’s bundled in with their recycling when I walked past each week on recycling day. If government is going to be involved in the personal financial lives of americans, it should be to encourage personal fiscal responsibility and consumption within one’s means. Our rate of consumption has become a vice, and it might make sense to tax it as such, instead of taxing money that is earned.

  47. superbmtsub says:

    @Baz: Consumption tax? Repuglican? Reduce personal spending? Create fiscal responsibility? Reagan’s rollin over in his grave!

    What’s the point in all this “save save” mentality if we spend more of our money on future unnecessary wars?

  48. bombed_pop says:

    @joeonsunset:$500 for an audit? More like $1-2K depending on the amount of time and work involved. A tax lawyer is charging by the hour for all the time spent with you, your paperwork and all of the IRS people s/he has to sit in appointments with. And if you have to switch lawyers, start that clock all over again. I am paying $260/hr to my tax lawyer to handle an audit that has been going on for over a year now and the next date with the auditor is scheduled for Feb. 08.

    An audit is not simple and many auditors will throw out legit items to get it off their desk which means taking it to the next level and spending more $$ and wasting tax payers $$ on the nonsense of it all.