Tag: Correspondence Audit

Posted on by Jan Roberg

3 Numbers That Can Get You Audited!

Some numbers can cause the IRS to audit your tax return.

Certain numbers on your tax return can cause the IRS to be more interested in you than you might like.

 

 

Can just one number cause you to be audited by the IRS?  Probably not.  But there are some numbers that are just plain old suspicious, and once your return gets flagged for review, a suspicious number can move you from the “review” pile to “audit” pile.

 

Now, you can ask an IRS auditor why you’re being audited, and she’ll tell you it was just a random audit.  And that’s usually a lie.  Random audits account for a very small percentage of the actual audits.  Usually, something makes the computer kick out your return for review – like unreported income.  And that usually generates a simple IRS letter, “Hey, we noticed you missed something here….yada, yada, yada, please send us some more information.”   That’s called a correspondence audit and they’re usually no big deal.  The IRS sends you a letter, you send them a letter back with some explanation.

 

But if the computer kicks out your return and the reviewer sees a couple of anomalies, well, then you’ll more likely to be asked for a personal appearance.   Let’s face it, you don’t want to make a personal appearance at the IRS office.  You don’t even want to have a correspondence audit for that matter.

 

So what are the three nasty numbers?

 

The first one is $5,000.  I often see this number for “non-cash charitable contributions”.  $5,000 is the value you can donate without having a written appraisal.  It goes on form 8283 which feeds to your Schedule A for itemized deductions.  Here’s the thing – if you are claiming that you donated $5,000 worth of items to a charity, you’d better be able to substantiate it – even if you didn’t have an appraisal.  First, you need to keep those receipts from Goodwill or Salvation Army.  Also, you want to maintain a list of everything you donated.  On that list you also want to write down what the item was worth at the time you donated it, and what you paid for it in the first place.  Here’s a clue:  if you bought a sofa for $1,000 and kept it in your house for 10 years – sitting on it, sleeping on it, letting the dog puke on it, etc.,   before donating it to charity– it’s not worth $5,000 now.  Just being honest with you here.

 

Another nasty number is $10,000.  For some reason, people who lie on their taxes like to lie with this number.  I once had a woman call me because she was being audited.  She was distraught because she had received a letter from the IRS about her charitable donation.  I told her it was no problem, all she had to do was mail a copy of the donation receipt to the IRS.  She said, “You don’t understand the problem, I don’t have a receipt!”  I asked her how much the donation was for, she said, “$10,000.”  I asked her who the donation was to, she said, “My college.”   So I told her, “That’s not a problem!  If your donated $10,000 to your college they will gladly you send you a copy of your receipt.”  She told me, “You don’t understand the problem, I didn’t give no money to my college!”  I now understood the problem completely and told her to write the IRS a check, I couldn’t help her.

 

Here’s the thing.  Sadly, liars like to use the number 10,000.  So if you have a real deduction that is for $10,000 – you really want to make sure that you’ve got your receipt.

 

My last nasty number is 20,000 – usually this is the number of miles claimed as a business expense.  The average male driver puts 16,550 on his car per year, female drivers average 10,142 – and that’s total miles.  So if you’re claiming 20,000 business miles it looks a little suspicious.  Especially if you claim 20,000 miles even.  Seriously?  You drove 20,000 miles even?  A round number like that is a lot suspicious.  You should always have a mileage log to back up your auto expense deduction.  You can get a blank copy here:  mileage log.

 

Are you noticing a pattern here?  Round numbers get extra scrutiny.  It’s okay if you have deductions that are round numbers, but make sure you can back them up with receipts or logs.

Posted on by Jan Roberg

Why Am I Being Audited By the IRS?

file cabinets

Photo by redjar at Flickr.com

 

The first question I’m always asked when someone receives an audit notice is, “Why me?  What’s wrong with my tax return?”

 

If you received an audit notice, that’s a perfectly legitimate question, and you have the right to ask.  It’s a very important question too.  The answer you get from the IRS can help you to limit the scope of the audit—that‘s really important.  If you know what the audit is about, you know where to focus your energies.

 

Often times, an IRS agent may respond with, “Oh, I don’t know why your return was pulled, it’s just a random audit.”  However, sometimes they don’t seem so “random”.  Actual random audits (and yes, they do occur) involve reviewing every single line item on the tax return.  They’re used to help determine how future audits are handled.    Most audits, are not random, and if you’re being audited you have the right to know why.

 

So what does trigger an audit?  The most common type of audit is called a correspondence audit.  Usually what happens there is that the IRS received a notice saying you received income from a source and it doesn’t match anything on your tax return.  They call it “document matching.”  (Hey, it’s the IRS; creative names are not their forte.)

 

Document matching audits are usually pretty simple.  For example, the IRS gets a W2 from a job you had for 2 weeks in January but you completely forgot about it at tax time.  You never got the W2 so you didn’t include it on your return.  That’s a fairly typical correspondence audit.  In a case like that you just sign the form and pay the tax.  That’s a simple “oopsies.”   You’re not a criminal, you just made a mistake.

 

Sometimes, document matching is kind of screwed up.  For example:  I just handled one where the document matching showed three interest statements for “First National Bank”;  one for $21, one for $16, and the third for $54.  The tax return showed interest for “First National Bank” as $91 ($21 + $16 + $54 = $91).  We just handled that with a phone call.  Document matching is done by computer.  Normally, a human would have caught the numbers added together and the audit letter would never have gone out, but the computer isn’t that sophisticated.

 

One of the best ways to prevent document matching audits is to make sure that you report everything on the correct line.   If you have a 1099 with an amount in box 7 and you don’t have a Schedule C with your tax return—that will generate a correspondence audit.  Another common correspondence audit involves capital gains.  If you’ve bought or sold stocks or had stock options through your job—there should be a Schedule D with your tax return.

 

If you’re dealing with something new in your taxes, even if you’re very good at preparing your own, I recommend at least having a second look done before you file.

 

In-person audits are more often based on statistical data.  The IRS uses something called a “DIF” score.   To put it in simple terms, a DIF score basically highlights when things on your tax return are out of the “normal” range.  Basically, a computer algorithm kicks out something like:   “Joe Schmoe’s charitable contributions are out of line with his income.  So Joe will be audited for his charity donations.

 

So how do you know what’s normal?  That’s the magic question isn’t it?  The IRS does not release its DIF score formulas.  Even if they did—if you have a legitimate deduction, you shouldn’t let DIF scores (or the threat of DIF scores) keep you from claiming what’s legitimately yours.

 

I once worked on an audit for a fellow whose return was being looked at for the mileage he claimed.  In truth, his actual mileage was much higher than what he reported, but his co-workers had convinced him that he shouldn’t claim all his mileage because he’d get audited.   Claiming the lower mileage didn’t protect him from an audit—and—it cost him money for all those years that he didn’t claim what was rightfully his.

 

Your best defense against an audit is always going to be doing your taxes right in the first place and having the documentation to back up your claims.

 

If you’re a W2 wage earner, the most likely audit area will be your charitable contributions and employee business expenses, because most everything else can be determined through document matching.

 

Small business owners (Schedule C) are much more likely to be audited—mostly because there’s so much more to audit.   In every Schedule C audit I’ve ever worked on, the IRS has requested the mileage log.  Every audit—mileage log.  Every single one.

 

In addition to the mileage log, they’ll often want to examine the expenses or the revenues, sometimes both.  If you own your own business, I can’t stress enough the importance of keeping good records.

 

If you’re being audited, the IRS agent should be able to tell you why.  If you honestly don’t know why you’ve been selected, and you’re not getting clear answers from the IRS, hire someone to represent you.  A professional can usually find the audit trigger (or triggers) within a matter of minutes.