Dealing with the IRS
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Over 1 million individual tax returns are audited every year, a figure that’s on the rise. About 80% of the unfortunate tax-payers wind up owing additional tax. What combination of tidal forces or plain bad luck subjects you to audit in the first place? No one outside of the IRS knows exactly, but this much is for sure:
• The higher your income, the more likely you are to be audited. Statistics indicate that just 3% of returns showing income between $25,000 and $50,000 are likely to be examined. But some 6% of those reporting $50,000 and up are audited.
• Deductions larger than the national norm often are scrutinized, too. If, for instance, you report charitable contributions or employee business expenses that are far higher than what most people with your income claim, the IRS is likely to want to know why.
Lately, the IRS has begun focusing more on returns through what it calls an “economic reality” approach to auditing. If the IRS thinks that your write-offs seem unusual based on your lifestyle or occupation, your return may be flagged for an audit. Particular targets of economic reality audits are self-employed people and owners of small corporations. IRS agents lately have received special training in economic reality investigating, defined by the agency as “the process of gathering information about a taxpayer which is a reflection of the individual’s financial status”. So the IRS thinks you’re living more lavishly than your income would normally allow, you may be called in on the assumption that you haven’t been reporting all your income. Similarly, IRS agents might look at your prior tax returns to see how much investment income you reported. If they spot a huge increase on your current return, you may be asked to explain where the money came from to produce that extra income. Once you come face-to-face with an IRS auditor, you may be asked about everything from your country club memberships to the vacations you take to how much you spent on your daughter’s wedding.
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