Avoiding an Audit (or making it less painful if you do get audited)

Be Aware of Random Audits

The IRS has resumed its practice of conducting random audits as a way to evaluate its audit selection criteria. Burdensome complete audits of taxpayers are rare. Random selection, however, makes these audits hard to avoid.

A Couple of Automatic Problems to Note

Missing Information – The IRS will contact you if you omit identifying information or information required to compute your tax. Missing Social Security Numbers are typical (including the Social Security Numbers of dependents and ex-spouses who are receiving alimony from you). This probably doesn’t change your odds of a real audit unless you can’t or won’t comply with the IRS request to supply the information or there is something else glaringly wrong with the return. If all goes well, your return will just go back into the “pile” to await possible selection in the normal audit “lottery.”

Math Problems – If the return contains a math or clerical error, the IRS may assess and send a notice of additional tax due without following the normal tax deficiency procedures. Congress has extended this power to certain other omissions and claims on a return that one would not normally think of as math or clerical errors. If you are claiming certain credits that require a Taxpayer Identification Number (TIN) on the tax return, make sure the information that the TIN issuer has is correct. If there is a discrepancy between the number you provide and that provided to the IRS by the TIN issuer (such as the Social Security Administration), the IRS will assume that the information provided by the TIN issuer is valid and treat your return as if you omitted a valid number. The IRS can then use the math error procedure to summarily assess any additional taxes due as a result of the disallowed credits.

“On the tax side, CCH® ProSystem fx® Engagement reduces time spent recreating spreadsheets for a times savings of somewhere between 20 to 40 percent per return. This is especially true when we have information that’s populated year-to-year.”

— Brian Gottschalk, Tax Partner, GellerRagans

Individual Audit Data*

Individual Returns Filed Percentage Audited
2015 2016
Total Individual Tax Returns 0.8% 0.6%
TPI < $200,000
— 1040 without Schedule C, E, F, Form 2016 or Earned Income Tax Credit **
— 1040 without Schedule C, F or Earned Income Tax Credit; with Schedule E or Form 2106***
0.3%
0.7%
0.2%
0.7%
TPI $200,000 < $1 million, non-business returns 1.8% 1.0%
TPI $1 million or more 9.6% 5.8%

TPI = Total Positive Income

Forms Filed By Self-employed Individuals
(Schedule C)
Percentage Audited
2015 2016
Sch. C TGR < $25,000 0.9% 0.9%
Sch. C TGR $25,000 < $100,000 2.4% 1.7%
Sch. C TGR $100,000 < $200,000 2.5% 2.2%
Sch. C TGR $200,000 or more 2.0% 1.9%

TGR = Total Gross Receipts; does not include returns with Earned Income Tax Credit.

*Data is from returns filed in calendar year 2015 and 2016, and is the most current available.
**Includes individual tax returns filed without a Schedule C (nonfarm sole proprietorship); Schedule E (supplemental income and loss); Schedule F (profit or loss from farming); or Form 2106 (employee business expense).
***Includes individual tax returns filed with a Schedule E (supplemental income and loss) or Form 2106 (employee business expenses) but without a Schedule C (nonfarm sole proprietorship) or Schedule F (profit or loss from farming).
SOURCE: Wolters Kluwer, 2018 Permission for use granted.

Whole Ball of Tax

Welcome to the 2018 Whole Ball of Tax — your premier resource for tax season updates and expertise from Wolters Kluwer Tax & Accounting. Here, you’ll find a wide range of topical press releases and updated charts featuring analysis from our federal and state tax experts. Visit often as new and updated information will be posted throughout the tax season.

Take a look at how a small company like Juravel & Company, LLC successfully competes with larger accounting firms. Or, find out how the ‘Engagement Effect’ can increase your tax preparation efficiency in 2018 with a complimentary demo!

AUTHOR

Bill Hatzos

Digital Marketing Manager Tax and Accounting North America Wolters Kluwer

All stories by: Bill Hatzos