Every tax season one of the biggest fears every person deals with is the dreaded ‘audit.’ No one ever wants to deal with them, and they have been built up in modern culture as dreadful to deal with usually. However, much of this hysteria is based on tax audit myths that do not apply. Here are five common tax audit myths to be aware of and why you shouldn’t sweat them.
Too Many Deductions Will Automatically Trigger an Audit – Taking a lot of deductions in and of itself is not a bad thing. The scanning system that the IRS uses to go over tax returns compares yours with many other comparable ones. What it is looking for are things out of the ordinary, such as claiming charitable deductions that amount to more than what you are showing as income. When serious irregularities like that show up then yes, the chances of an audit increase substantially. So the actual number of deductions you take won’t cause any issues, especially if they are in line with other tax returns that report similar incomes and use many of the same deductions.
Making A Lot of Money Automatically Triggers an Audit – While there is some basis to this myth, namely that once you begin to earn $200,000 or more in income per year, your chances to receive an audit do noticeably increase. However, this does not mean that a) you will automatically receive one, and b) that earning less than $200,000 means you are fully exempt from being audited. Due to budget cuts over the past few years, the IRS has started performing more audits on lower-to-mid income taxpayers than ever before.
A primary reason for this is because of either under-reported or unreported wages from W2’s or 1099’s. These audits are handled primarily as “desk audits,” meaning they are issued by mostly automated programs as well as IRS letters. Because higher income individuals usually have their tax professionals under employ and more sophisticated tax strategies in play, the expert workforce that the IRS needs to use provides further strain upon the agency. As a result, they have chosen to go after the low hanging fruit via their desk audits.
Professionally Filed Returns Won’t Trigger an Audit – A significant number of taxpayers today use online programs to both fill out and file their taxes. However, many people believe that using these programs will increase the risk of an audit and instead choose to go still with a tax professional to do the job for them. While most tax professionals will handle this service and not cause any problems, that does not mean that only using a pro to file your taxes will automatically avoid an audit. The reason being that if you work with someone who promises you an unusually high refund check for deductions you’re not sure you can take, chances are things are looking too good to be true. If that is the case, then your chances of being audited rise substantially.
Audits Are To Be Feared In Every Case – The prevalent myth out there regarding audits is that they signify you’ve somehow done something horrible or illegal, and now the IRS has come to exact punishment upon you. In reality, that general assessment couldn’t be further from the truth. Most audits usually boil down to a discrepancy between records and numbers. So instead of thinking of them as “you’re hiding something from us,” more than likely the general tone will be “our records show this and that, is this information correct?”. In many cases, either more information is required, or additional money will need to be sent in to take care of the error. However, that’s all that is usually required – no penalties or other consequences are levied.
Audits Happen Immediately After Filing Your Return – Again, because of the sheer volume of returns it must process and its limited resources, the IRS can take its time to initiate an audit on you after you complete your filing. In general, the agency holds to a three-year statute of limitations to work with after a filing is finalized. For more severe errors, it can go back as far as six years which is why it’s not a bad idea to hold onto your tax filings and associated records for at least that long. When it comes to regular audits, though, they tend to occur in the later half of the three-year statute of limitations. So at a bare minimum, keeping records for the last three years before your most recent tax return filing is a safe and good idea.
Thankfully, the team at Anderson is aware of all issues and takes them into account when filing taxes for the many clients we have helped over the past twenty years. Our team of CPAs and advisors stay abreast of the latest changes to make sure all the necessary filing information is correct and avoid every possible reason for an audit. If you are looking for a new team to handle your corporate returns and put these tax audit myths to bed permanently, then feel free to contact our office to speak with one of our team members to assess your needs and how we can help.