The IRS has scaled back. It’s not answering most taxpayer’s questions. It’s even printing fewer of its instructional booklets and it’s operating with a smaller budget. Does that mean this is the year to cheat on your taxes? The simple answer is no. The IRS may decide to look back at returns filed in the last three years when it audits a taxpayer and for what it deems a substantial error, the IRS may go back six years. So, even if you shade the truth or outright lie on this year’s return and you get away with it, the IRS can still come back years later and penalize you.
Let’s be clear. Most of us aren’t plotting how to get one over on the IRS. Instead, we’re trying to make sure we don’t get audited. The good news is you can control most of the things that will get your return a second look but not all of them. High income earners, for example, are more likely to get a second look because the IRS focuses on where the money is. Audit rates for $1 million plus earners is 10.7 percent, while the audit rate for those earning $200,000 or less is 0.78 percent. Likewise if your deductions are higher than the average taken by people in your tax bracket or if you are self-employed or own your own business, chances are your return will fall into the pile for further scrutiny. Things you can control that can result in an audit include: failing to report all your income, writing off losses for a hobby or business expenses.
Even the most careful filer can find themselves on the other side of an audit. If you do get a letter from the IRS, you should have a professional handle the inquiry. Don’t be surprised that you’ll have to back up your claims. It’s really all about the documentation. If you claim unreimbursed business expenses, for example, you have to prove each and every restaurant tab and plane ticket expense was paid for by you. That means you will need to have receipts in hand. Dominick Tavella, Diversified Private Wealth Advisors president advises taxpayers to answer only the questions that are asked and no more. Don’t get emotionally involved, says Tavella, the agent is only doing his or her job. Bottom line, if you’re audited, don’t panic.
To hear more from Tavella about what you need to know about the audit, join The Willis Report on the Fox Business Network tonight at 5p.m. ET.