Tax Audit Myths
An audit is arguably the most dreaded outcome of the tax filing process, and the situation carries with it some unsettling mystique. The popular perception has the Internal Revenue Service showing up on your doorstep, or your place of business and randomly seizing the bulk of your personal assets. However, experts say, audits contrast greatly from the myths.
Audits are something most people should not be afraid of. A lot of times the government doesn’t want to do these audits.
In fact, one of the most enduring tax audit myths holds that an audit is a common occurrence. The experts generally agree that the IRS would rather not have to audit. One reason is because of the resources required to conduct an audit, and the negative audits generate.
Historically, only about 1 percent of filers get audited. The IRS has a system designed to discriminate the information function to determine what returns are worth an audit. This process called the DIF scoring system compares returns of peer groups. If a person’s financial data differs significantly from those established by his peers, the system produces a high DIF score. A high DIF score increases the chances of an audit.
Fact of the matter is the IRS audits only a small percentage of filed returns. Nevertheless, myths about who or who does not get audited, and why, run the gamut.
Myth: Be very afraid of an audit
One looming myth suggests the audit process is something one should panic about and feared desperately. The truth is that most people generally only need to respond to a few IRS questions. Typically, you’ll need to send information or a check for the additional money and that’s, that.
Myth: Professionally filed returns are audit-proof
Paying an income preparer will not shield you from an audit. Competition among tax preparation companies is fierce. The most effective way for these places to compete is to claim to get you the biggest refund.
In many neighborhoods, particularly in low-income areas, tax preparation operations use false advertising and other deceptive practices to lure clients in with the promise of large refunds. The taxpayers often do not understand the process or what they are claiming on their returns, often resulting in the possibility of being audited in the future.
Among the less scrupulous preparers, they’ll do family splitting to optimize the Earned Income Tax Credit, like, ‘You take these kids and you take these kids, that way you’ll get $8,000 rather than the $6,000 you would have gotten.
Such steps can trigger an audit, interest and stiff penalties.
Myth: Those with low to moderate incomes don’t get audited
The IRS increases the number of audits it does in response to current economic conditions. People should not think they’re in the clear just because they do not earn a lot of money.
The IRS conducts audits for all incomes. It is for this very reason that over the last few years they’ve been hiring more people.
Still, even though the IRS has increased its level of auditing, the number is a very small percentage of the returns filed.
A deeper understanding
Although these are some of the most popular myths, experts say plenty of other misguided beliefs about audits run rampant, some even with their own regional flavor. The bottom line is to understand what the process is all about.
Many of the myths about auditing are quite narrowly focused on the Internal Revenue Service, believing that the IRS is the only taxing entity that matters.
More headaches have had to do with state returns. The IRS could be considered as tame compared to some State (tax revenue) Agencies. No one is hungrier for revenue than the States. Most States are broke and working hard to increase revenues. State Revenue Agencies will not be as friendly, by and large, as their Federal Counterpart.
Tax filers should be at least as diligent and careful when filing their state returns as they are with their federal tax returns.
Grobe and Associates has you covered
For helpful advice on Federal and State tax issues that will work for you, set up an appointment with one of our certified public accountants today at 608-210-1200. We look forward to meeting your accounting needs and making improvements to bottom line.