You think you can outsmart IRS? Think again!
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This is a continuation from previous post about Dealing with the IRS.
Another fairly new wrinkle: audits based on your occupation through its Market Segment Specialization Program. The IRS is in the process of focusing its sights on particular businesses, preparing audits manuals for agents specifically about the likes of every category from lawyers to Laundromat operators. In these manuals, agents learn the tricks some wily taxpayers use to hide income based on their occupation.
Math mistakes are likely to be caught by the IRS computers. In these instances, your audit is likely to be little more than a letter from the IRS saying that you screwed up in your calculations and you owe some extra bucks.
Where you live may make you more or less susceptible to an audit. Research revealed that certain IRS districts –that’s the way the IRS divides up the United States –have far higher audit rates than others. People living in the 10 toughest target districts, on average, face double the risk of being audited as taxpayers in the other 53.
You may be the target of an IRS special project. In recent years, these projects have focused on tax shelters, home office deductions, direct-sales businesses (such as an Amway or Shaklee distributor), and the “underground economy” –unreported income by persons who moonlight for cash or barter.
Every three years or so, the IRS has unloaded its big-gun project: the Taxpayer Compliance Measurement Program, or the TCMP audit. This is an excruciating line-by-line audit of randomly selected taxpayers; 153,000 people were selected for their ’94 returns. It was postponed in ’95.
Many people believe that if the IRS does not call them in for an audit within six months after their return is filed, they are home free. Receiving your refund checks does not mean you are immune from audit, however. The IRS has three years from the date your return was filed or due, whichever is later, to audit your return. (There is no statute of limitations for fraud, however. If your reported income is overstated by 25% or more, the IRS has six years to audit).
There are three types of audits:
Correspondence audits originate at your IRS Service Center (where you sent your return) and are handled entirely through the mail. For this reason, they generally involve only minor matters requiring a letter of explanation or simple documentation. You are most likely to face a correspondence audit if the income on your return doesn’t match the amounts reported to the IRS on W-2 and 1099 forms.
Field audits usually target businesses, and for these an IRS agent comes to your home or business to review your records.
Office audits are the most common type, and for these an individual gets a personal invitation to come down to the local IRS office. The audit notice will tell you to call for an appointment or to come in at a specified date and time. Read this notice closely. It contains valuable information about who may represent you at the audit and outlines your appeal rights. It also tells you the items on your returns that are being questioned –usually broad categories, such as medical or employee business expenses. Included with the notice will be information guides noting the types of records you’ll need to verify the items being audited. Office audits are usually limited to two or three issues, so you won’t be expected to haul in all your records and prove every entry on your return.
An exception is the TCMP audit. If you’re unlucky enough to get tapped for this one, you can expect an IRS agent to grill you on every single line of your return. That’s because you are being used as a laboratory animal. By studying returns like yours so closely, the IRS believes it can get a better idea of where taxpayers in general are fooling around on their returns or at least getting confused. The data from these audits also is used to determine the average amount of exemptions, deductions, losses, and credits claimed by taxpayers at all income levels. The results of this survey then get compiled to form a picture of the typical tax return, which the IRS computers will later use to judge whether a taxpayer’s return looks like good audit material.
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