Wednesday, January 22, 2014

Will you be audited?

Now that our tax season is ramping up, I thought it would be good to address the question that we get a lot: Will I get audited? Here’s the low down on IRS audits:

Statistically overall audit rates have actually declined in the last couple years. Not only have IRS personnel been spread thin to deal with implementation of Obamacare and preventing ID theft, among other things, but overall headcount at the Service is down from previous levels due to budget cuts.

However, if you fall in to certain categories, your odds of losing the audit lottery are high. If your income is in the seven figure range you can count on a 10% chance of being examined. If your income is less than that but greater than $200k, your odds are about 3% of being selected. If your income is less than $200k your overall odds of an audit are slightly less than 1%.

Certain items on your tax returns will increase the odds of imperial entanglements. Things like claiming real estate professional status, running a cash intensive business, showing a large loss for a sole proprietorship, and taking deductions disproportionate with your level of income all are red flags inviting scrutiny.

And woe be to the owner of a foreign bank account that failed to disclose it to Treasury! Many former safe banking havens are caving in to US demands to share information. When that happens, it results in an investigation, and the penalties for failing to disclose such investments are very steep.

Bottom line: with reduced resources the IRS is still able to focus on high probability targets. If you fall into these categories the time to prepare for the examination is now, not when you get the “Dear Taxpayer “ letter.

Tuesday, January 21, 2014

They are Watching !

I was recently surprised to learn that the IRS’ website,  www.IRS.GOV, has a new feature. You can type in some personal data and download transcripts of your own tax return.  Wondering how well the government website designers had fulfilled this objective (call me a skeptic), I decided to give it a try.

My first attempt went well until I got to the part about establishing an account or proceeding as a guest. Apparently “guest” was the wrong answer. I was booted off the website.

My second attempt got as far as the security questions. I expected them to ask about stuff on the tax returns I submitted. The question I was asked was: in 2005 you may have obtained a loan to purchase a vehicle. Which lender was that with? I was given 4 choices, none of which looked familiar. I chose “none of the above”. Then I was asked how much my monthly payment was. I can’t remember what I had for lunch yesterday let alone what a car payment was nine years ago. And where does this ever show up on a tax return anyway? The system didn’t like my response and I was bounced out again.

My third attempt got as far as the security questions again. This time I was asked what year my house was built and what did it originally sell for? HUH? I’m not the original owner, so how should I know?  More disturbing, how do they know? My response got me bounced again and locked out for 24 hours. I would have been locked out longer if I could have keyed in what I was thinking...

When private companies access your credit report, they must seek your permission first. Apparently the Federal  government is not so constrained. The take away here is that if your tax return is being examined, you should assume that the examining agent has instant access to data that even you don’t have. If you think you are going to conceal something, think again.