If we say the word “tax audit” or “IRS auditor” what is the first thing that comes to mind? Our guess is that due to a number of different factors and commonly held misconceptions most laypersons conjure up a variety of images and “facts,” none of which resemble anything close to an iota of truth. In fact, most American taxpayers don’t even understand the basics of what an audit even entails. Enter us! Allow us to take this opportunity to clear up some of the confusion here and now by dispelling some of the largest myths concerning tax audits today. Upon reading this short, yet informative blog you will be much more informed on all things regarding tax audits and will even be able to make better decisions regarding your tax returns. You may even impress your friends and family at your next soiree by giving out tax advice like a pro.
First and foremost, we should probably explain briefly what an audit even is as many are in the dark. Although it may not exactly be a trip to Disneyworld, tax audits are not nearly as unpleasant as people think they are. Generally being audited just means you have to dig up some extra documentation, submit it to the IRS and move on with your life.
It is also worth noting that over the past three years, less than a mere 1% of tax-filers have undergone an audit, meaning that the probability of it happening to you are relatively low to say the least. Before we dive into the five most commonly held myths regarding tax audits it is important to note that not all of these misconceptions strike fear into the hearts of tax filers; there are some fallacies that actually do the opposite in that they create a false sense of security and overconfidence. In other words, due to certain variables the taxpayer is under the false impression that he or she cannot or will not be subject to an audit. For example:
1.) My annual income is not high enough for the IRS to even bother with the likes of me, so I can’t/won’t get audited.
FALSE. As a matter of fact, in 2014, those who reported earnings ranging from $1 to $24,999 was actually double the rate of those who were audited and earning between $25,000 and $99,999.
Just because your earnings may be less than average or even optimal does not mean that you can fly below the government’s radar thereby making it easier for your reporting blunders (whether intentional or not) to go unnoticed. It is completely understandable why someone may think that is in fact the case but as a matter of fact, making no money at all actually increases your odds of being audited exponentially.
In 2014, when less than 1% of the population was being audited as a whole, over 5% of those who were audited reported no income at all, ergo making them account for a group more than five times the audit rate of the overall population.
On the flip side, the opposite is also untrue:
2.) I make a lot of money so I am pretty much guaranteed to get audited.
This myth is in fact based in some truth as higher earners are more likely to get audited than those earning between $25,000 to $99,999. This is even more applicable for anyone earning over $1 million. For instance, in 2014, over 6% of those taxpayers who reported earnings between $1 million and $5 million were audited and over 10% of those individuals who reported earnings between $5 million and $10 million also found themselves in the same predicament. Furthermore, over 16% of those who also found themselves on the audit list were amongst those who earned upwards of over $10 million. So all told, over 32% of those audited in 2014 were those who reported earnings of $1 million to over $10 million with over half of that number making up the $10 million and up earners.
However, just because you make a substantially large income it does not stand to reason that you are guaranteed to be audited. Be on your best behavior and the odds will be in your favor that the IRS will leave you be.
3.) If I use an accountant, I won’t get audited.
This is a common misconception and although accountants and professional preparers may be more well-versed in all things tax returns, they are still human and just as fallible as the rest of us.
Furthermore, if you have your returns prepared by an accountant and it gets flagged by the IRS because, for instance, there is a questionable amount of deductions, you are still culpable for the erroneous (or even fraudulent) returns even though they were prepared by someone else.
Hiring someone to prepare your returns does not diffuse your legal responsibility to insure that said returns were prepared accurately and are reflective of your true financial state.
So be sure to go over your returns line by line before signing and filing them. If something does not look right, speak up because you will be held responsible down the line.
Furthermore, if you do find yourself being audited be sure to hire representation and that that representation is NOT the same individual or firm who filed your returns. It is imperative that you retain someone (a tax attorney is always your best bet) who had no hand in preparing the returns in question.
4.) Conversely, preparing my own taxes greatly increases the odds that I will be audited.
Many people fall into this trap, thinking the best way to protect themselves is to hire a professional but as we have already illustrated, that does not guarantee anything, and, in fact, the opposite is also true.
If your taxes are simple and straightforward there is no reason to believe that you cannot save yourself some money and file the returns yourself, provided you are capable of following simple instructions and entering the correct information onto your return or into your tax software.
According to a study conducted by the U.S. Government Accountability Office, only 2 out of 19 professional preparers correctly calculated the correct refund amounts for their clients.
Unless your taxes are more complex and you require the help and expertise of a professional accountant, you are better off saving yourself some money and filing your returns yourself.
Bear in mind, however, that anyone is capable of committing mathematical errors despite their level of intelligence and thus, you should file your returns electronically if you do choose to go the solo route.
According to the IRS, the error rate for a paper return is 21% whereas less than 1% of electronically filed tax returns contain errors.
5.) I am self-employed so no matter what I do, I may as well prepare myself now for a tax audit as it is inevitable and a necessary evil for anyone who is self-employed.
While some freelance individuals and those who are self-employed may put themselves at greater risk for being audited by getting a bit carried away with their deductions or under-reporting earned income, it does not mean you are likely to be targeted simply because you are a freelance or self-employed wage earner. As long as you remain completely truthful about every item on your return and don’t fall prey to these same bad habits.
As tempting as it may be to stretch the truth a bit regarding income, expenses, deductions etc., do not give into that temptation as it is a slippery slope and the fruit it bears is going to taste very bitter when the IRS inevitably comes knocking.
The misconceptions that we have outlined and dispelled here are very commonly held by the American public so do not feel too bad if they were some that you also had. Instead of dwelling on what you believed to be true, your time and energy will be better spent on heeding the advice we have laid out for you.
As it goes for just about anything in life, the best way to prevent yourself from being audited is to always remain honest and to file your tax returns with the utmost of integrity. Beyond that, there are no secret tricks or hard and fast rules which will insure that you don’t get audited. Anyone who tells you differently is trying to sell you something or is grossly misinformed. If you do find yourself in the hot seat with the IRS, however, you should always hire someone to represent you for the audit, even if you have done nothing wrong; your best bet is to go with a tax attorney as they are the most highly qualified for dealing with the IRS and are the most familiar with the ever-changing tax laws in this country.