Are You About to Get Audited?

  • Have you ever wondered why some tax returns are audited by the IRS while most are ignored? Well, there’s a whole host of reasons to this age-old question. The IRS doesn’t have enough personnel and resources to examine each and every tax return filed during a year, so they rely on a variety of systems to target the returns that they believe will generate the most revenue per hour of time for the auditor.

    Why Lower Incomes are Audited at a High Rate

    Often the more lucrative “return-on-investment audits” for the IRS are not the big corporations, but the self-employed single parent raising children at home. Why is that the case? Because the larger companies have tax experts to defend them; tax attorneys that usually know more about the Tax Code than the IRS auditor-employee.

    The reason the “return-on-investment” is so lucrative when auditing the self-employed parent, is because there are many credits that the IRS could easily reverse, such as Earned Income Credit, Additional Child Tax Credit, Day Care Credit, and Higher Education Credits. All the IRS needs to do is deny a few business deductions, which would be very easy to do, since the self-employed parent’s business knowledge would most likely not in the area of taxation.

    In fact, he or she may have a difficult task in defending even common positions taken on the tax return due to the complexity of the Tax Code and some very common misconceptions of many small business owners. When the IRS auditor succeeds at denying even some moderate deductions, the adjustments against the taxpayer begin to snowball.

    The adjustment, of course, would increase income taxes, but it most likely would also increase self-employment taxes; and now cause a reversal of the credits allowed that were mentioned above. The credits that had been used to reduce taxes when the original tax return was filed now must be repaid. The tax liability could easily be approaching four or five thousand dollars.

    Once the IRS auditor gets the taxpayer to agree to the additional assessment of taxes for the year in question, he or she will most often make the same adjustment for the other two open tax years. This often catches the taxpayer by surprise. The self-employed parent taxpayer agreed to the, let’s say, $4,500 adjustment and now learns that he tax will be multiplied by three to cover the other two open tax years, bringing the tax liability up to about $13,500. Then to make matters worse, the auditor often adds an accuracy-related-penalty and is required to add interest dating back from the original due date of the tax return to the present date.

    The total assessment could total about $16,500 in this case. That is not a bad “return-on-investment” for the auditor who may have only put three or four hours of time in ripping-up the self-employed parent who had prepared his or her own tax return and now had tried to represent him or herself in the audit. It would have been much more difficult for the IRS to win so easily against a tax attorney or Enrolled Agent, who would have taken the IRS to task and required that the IRS present their reasons for each assessment of additional tax.

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