How do people get Audited?

How do people end up getting Audited? And what happens when someone gets Audited?

When people get an IRS notice about a tax situation, you are being audited.  Most of the audits are done with notices now.  Most people don’t realize that and don’t take it seriously.  But you should.  It is serious and always has a date attached to it.  So pay attention and call a CPA.

This article pertains to individuals.  It’s a whole another world of how businesses get audited.

People are selected for examination either by computer or by manual identification. IRS uses a mathematical technique called  the Discriminate Function (DIF)system. Each  return is given a score.  Those with the highest score are audited.

But before they are, it must be manually screened by an examiner.  First to see if it is warranted for an exam. Then to determine the severity of the issues.

Its then determined if it can be handled by mail or needs to be done in house.  Usually those that are done in house either require a judgment call or evidence of receipts.  It just can’t be handled by mail.

There are certain standards that examiners must follow in determining if a tax return should be audited.

1)All large, unusual or questionable items must be considered.

****I had a client audited once because she was able to deduct a large amount of medical deductions. This is very unusual because most people cannot take medical.

2)Inquiries are made on unreported income.  Either a W-2 or 1099 was not picked  up on your tax return. Or there was 1099 from  your investment firm that did not get reported.

****I get people all the time who get notices because they have cashed in some stock and did not report it.  Keep in mind IRS gets a copy from your employer or investment broker of this activity.  When it does not match up to the tax return.  Its cause for an audit.

3)Sometimes someone will get a notice because of an error in the calculations. I get people who have tried to do it themselves.  Even with a tax accounting software, the questions get confusing and something gets reported in the wrong place.

4)Warning:  do not EVER send in a hand written tax return.  It’s a big red flag!

5)Those with higher income do get audited more often. In 2010, 71% of those audited had adjusted gross income between $100,000 and $200,000.  1.92% with those with income ranging from $200,000 to $500,00 AGI were audited.

Higher income individuals are being targeted. Especially over $500,000.  I saw it this past year with a couple of clients.  I had one that got hit by more than one new law that IRS implemented targeted at higher income people.

If you do receive a tax notice, try to stay calm.  Read it after you have calmed down and can think clearly.

Its standard procedure for the taxpayer to have 30days to dispute the claim.  If you call them they will usually give you more time.  Especially if the CPA calls.

I usually sit with the client and help them determine what IRS is asking for. Why are they proposing changes.  What are they asking for.

Most of the time, a corrected return needs to be prepared.  I offer this service to the client.  Then  the taxpayer will need a response to the letter. I also offer this service.

It’s rare that a taxpayer needs to file an amended return.  They just want to know about the changes.

What are your chances of being audited? For 2009, 142,823,105 returns were filed.  Of that number 1,581,394 were audited.  That’s about 1.1%.  Of those audited, 30% claimed the earned income credit.

So in conclusion, if you get an IRS notice, hire a professional. It’s usually complicated and warrants an experienced individual to handle the situation.

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Evelyn Edwards, CPA in Austin Texas