When we were talking about IRS audits a few weeks ago, we mentioned that audits are no longer random. The IRS has filters in place that flag tax returns that fall outside of the norm or include information that requires a closer look. One example was a return that reported $60,000 in income with $30,000 in charitable deductions. It just does not look right, so the return is flagged for review.
We are back to discussing what the average taxpayer should do if the mails brings an audit notice from the IRS. In our May 16 post, we talked about the odds of being audited -- very slim for someone with an average paycheck -- and the types of things on a tax return that could trigger an audit. For the most part, the IRS is not interested in casting a wide net to scoop up as many taxpayers as possible. The agency is more interested in the people whose returns show anomalies, and the more anomalies, the more likely an audit.
As we said in our May 2 post, the average American taxpayer has a 1 percent chance of being audited by the IRS. The chance increases to 3.26 percent, though, for taxpayers earning $200,000 in 2013. If you earned more than $1 million -- not unheard of in the Bay Area -- your chances increase to almost 11 percent.
Although most Americans have already filed their 2013 taxes and are waiting to hear back from the IRS, there are still some who have yet to submit their returns. One of the thoughts on many taxpayers’ minds after submitting their tax return is, “I hope everything was correct.” This is a natural though, and most of us have heard stories about the IRS auditing individuals and businesses for potential tax fraud or evasion.
This is the time of year when the issue of a tax audit is most on the minds of the average California residents, because many are in the process of preparing their yearly income tax return. Tax audits are a generally intimidating proposition and most people do everything they can to avoid an audit. However, without insight into how the IRS works and what types of things can trigger an audit, this can be hard to do.
This time of year, tax audits are on everyone’s minds as we rush to compile financial paperwork and sit down for the task of completing our annual income tax returns. The ominous threat of the tax audit lurks in the background, waiting to jump out like a boogeyman if we make a mistake or miscalculate our tax liability. One of the reasons why so many people are nervous about a tax audit is because we have some ideas in our minds that might not be totally true, urban tax audit legends, if you will.
If you surveyed the average American about what they fear most, a tax audit is probably near the job of the list, just after natural disasters. Tax audits are a fact of life for many, particularly those who have significant assets or who own a business. And, in reality when faced with a tax audit it can be less frightening than it is from a distance, since it is often easier to tackle a concrete set of problems than to worry about a nebulous threat.
As the government shutdown continues, many Californians who have pending business with the government have been left with a lot of questions. For those currently involved in a tax dispute or an audit, figuring out what to do next in light of the shutdown can be confusing and stressful.
Data from the 2012 fiscal year shows that there may be some relationship between the reduced budget for the Internal Revenue Service and the percentage of tax returns that are audited each year. Between the 2010 and 2012 fiscal years, the IRS suffered from a three percent reduction in its budget. This in turn lead to workforce reductions, sending 8,000 full-time employees packing. Out of those 8,000, about 5,000 were auditors. Given those numbers, it is not a big surprise that the IRS collected 13 percent less revenue through audits in 2012.
If you own a business in California, you know what a challenge it can be. You have to make sure your operation runs smoothly, and that means managing people, time, money and more. One thing that all business owners have to deal with is taxes.