Thanks to the budget to run the IRS itself having been slashed in recent years, IRS agents aren’t auditing as many people as they used to and have become more ineffective in getting increased tax payments from those they do an audit. Here we will look at some recent journalism on tax audits and suggest some actions should the IRS state that they are going to audit your tax situation.
What is a tax audit?
Millions of tax returns are assessed every year automatically by the IRS computer system. Many of those are flagged up for a manual review and agents will look at those tax returns. In some cases – just under 160,000 nationwide in 2018, down from 270,000 eight years ago – an agent will be tasked with an ‘office examination’ or a ‘field examination’ of a person or company’s tax affairs.
For simpler cases, you or your tax representative may be invited into your local IRS office to discuss your accounts over a certain period of time. If you are invited you really should have a CPA or tax attorney with you – if you are LA based, call us here at Defense Tax to represent your case to them.
The fact is you will probably see no change in the money you owe the Treasury. We will look at why now.
National Taxpayer Advocate reports to Congress
In March this year Forbes reported the 20 points the National Taxpayer Advocate, Nina E. Olson took to Congress. In amongst the issues she raised, Forbes reported: “With limited resources, the IRS may need to be more discriminating in choosing cases. Currently, field exams have unacceptably high no change rates.”
Yes, that’s right – a high number of those taxpayers that the IRS visited at home or in their place of business to assess their tax position were found to be honest, or at least in the correct financial position that they reported to the IRS when they filed their tax returns. What that means for you is that unless you know yourself to have been taking liberties with your tax return, in many cases you may have been randomly targeted and with little bearing on your genuine position with regard paying your taxes.
In 2010 the IRS had around $2 billion a year more in its own operating revenue and was able to conduct more and more thorough field tax examinations. In 2010 it did 272,000 field exams, while in 2018 this fell to 156,000. The budget cuts reduced numbers of IRS agents and added pressures to those who remained. People are the same the world over – you can only put them under so much pressure before they become inefficient and start missing things.
Who is targeted the most?
In December 2018 The Atlantic and Propublica online magazines jointly published an investigation into the effects of cuts at the IRS. Where it comes to field audits it found that the very rich get off lightly yet the poor are disproportionately targeted for relatively less financial returns for the IRS. This is when, as Porpublica alleges, the wealthier you are the more likely you will look for legal and otherwise ways to avoid taxes than someone who is just getting by on what they make.
Propublica reported, “it takes specialized, well-trained personnel to audit a business or a billionaire or to unravel a tax scheme – and those employees are leaving in droves and taking their expertise with them.”
For less well off people however, the investigation found that the IRS shows a lot of interest in those on earned income tax credits: “the IRS has long made a priority of auditing people who receive that money, and as the IRS has shrunk, those audits have consumed even more resources, accounting for 36 percent of audits last year.”
From this, it appears that if you are on an extremely low income you have almost as high a chance of a tax audit if you are on less than $20,000 a year as if you were on $500,000 a year. Steering clear of the politics behind it, it does show two of the main groups you are likely to belong to, with close to 72% of audits being directed at the very poor and the upper middle classes.
If you are self-employed and have a higher income you fall into another target group. The Colorado Bar Association showed, “More than 95% of personal tax audits occur as a result of entirely objective statistical reviews of filed returns. Through a complex system known as “DIF” scores, IRS looks for particular items in returns that it has found from statistical analysis to indicate a higher than average chance of tax understatement. Returns showing very large gross incomes, and those having Schedule Cs (sole proprietorship) are frequently picked, often based on the amount of deductions claimed in relation to gross business income.”
Call Defense Tax if warned of an examination
As with representation before law enforcement, it helps to have an expert representing you during IRS examinations. Whether an office or field exam, if you have an expert with you to represent your position accurately and in the IRS own language you will be more likely to walk away with a ‘no-change’ result for your tax bill.
The Colorado Bar Association again:
“No reasonably experienced IRS agent will assume or presume that you have anything to hide just because you chose to be represented. You can hire a CPA, attorney or IRS Enrolled Agent to represent you, or the paid prepare of your return can represent you.”
It is important to remember that we do charge money and that you should consider hiring us if it makes financial sense to have a legal representative or expert with you when you undergo the exam. When you make contact with IRS Tax Attorney or Search on google “Defense Tax” that is offer a free consultation to discuss your position and to assess the benefits of working with us during that exam. You may well walk away with a better result if you do so.