It is ABSOLUTELY no fun to see that envelope from the IRS in your mail, and when you open it to find they have decided to audit your return, it’s even less fun!
So what causes some taxpayers to be audited while others
never seem to have any contact with the IRS?
As with many things these days, computers and their programming look at
data that lies “outside” of an average, and then, flags a return based on that
data. Let’s look at a few of the most
common ones and how they impact W-2 employees…
· The
biggest one, by far, is failing to report ALL taxable income. Many times, of course, this is a simple
mistake on the part of the taxpayer – maybe they forgot a bonus, or some small
dividend, or even a part-time job or contract they only had for a month or
two. Nevertheless, the tax law is
simple: ALL income is taxable and ALL
income is reported to the IRS both from the taxpayer and the entity that pays
the taxpayer. Somewhere in the bowels of
the IRS, those two numbers are matched up and when they don’t match, guess
what? It either flags the return for an
audit or the IRS simply sends you a bill for the untaxed income.
· Taking
an early payout from a 401(k) has always been a red flag for the IRS, but with
so many Americans having to break into retirement savings in the last year, the
simple mistakes that are usually made – not claiming the money, not paying
taxes or penalties on the funds, and so on – are a real challenge for a lot of
people. The IRS’s own studies have shown
that as many as 40% of people who take a payout from their 401(k) fail to
properly document the income and pay the taxes, so they are on firm ground when
they look to review the returns of anyone who has taken money from their
retirement account.
· Ironically,
even depositing large amounts of currency can trigger an audit. The IRS has long required banks, car dealers,
and even pawn shops to report any large cash transactions (over $10,000), but
that rule also extends to individuals making “suspicious” transactions “near”
that amount. Let’s say you deposit
$9,500 cash one day in the bank and the next day, deposit $5,200. They’re still going to flag you and the IRS
may begin to scrutinize your return to look for inconsistencies. Is it fair?
Not really, but nobody ever said that 70,000 pages of tax law was right…
The key thing to remember is this: an audit isn’t saying you did something
wrong, it’s saying that something in your return simply doesn’t match up. The good news is this: the odds of being audited are incredibly low
if your income is less than $200,000/year.
Even if you’re a millionaire, the odds still aren’t that high,
either.
The truth is, in many cases, taxpayers with inconsistencies
are usually simply sent a bill and expected to pay – and most times, that’s the
exact advice I give – “it’s not worth fighting the IRS for this, just write the
check and be happy.”
On the other hand, if you find you’re going to go through a
full audit, the smartest thing to do is to reach out to me and the team ASAP
and begin to collect the information we need to fight – and win – against the
IRS.
IMPORTANT: Our firm specializes in tax resolution. We serve clients virtually so don't hesitate to reach out. If you want an expert tax resolution specialist who knows how to navigate the IRS maze, reach out to our firm, so we can schedule a confidential consultation to explain options to permanently resolve your tax problem Make an appointment here! Or, call Toll-free 1-855-254-1892.
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