By David Wilkening, Contributing Writer
REGION – Being audited by the IRS is high on the list of things that many Americans dread.
It’s a fearsome possibility because of the tax agency’s reputation as a dogged collector of income taxes. That possibly exaggerated image was reinforced with the federal government’s passage last year of the Inflation Reduction Act, which gave the IRS another $80 billion―most of it supposedly for greater enforcement of higher income individuals.
It was admittedly a bipartisan political issue. Democrats said the money would go to the undermanned enforcement branch of the tax collector. Republicans said it would lead to drastically higher audit rates for all Americans, claiming the move would double the chances of being audited.
Low odds for most people
But even if that’s the case, so what? If you’re a senior citizen or a retiree, in all probability, you should continue to sleep soundly. For one thing, your chances statistically of being audited are not likely. The vast majority of more than approximately 150 million taxpayers who file yearly don’t have to face it.
Less than one percent of taxpayers get one sort of audit or another. Your overall odds of being audited are roughly 0.3% or 3 in 1,000. And what you can do to even reduce your audit chances is very simple. And may surprise you. If worse comes to worst, as the old saying goes―even if you are audited, it might be far less unpleasant than you believed.
Still, the IRS’s ruthless reputation lingers. A recent Lexington Law survey found 25% or one in four were afraid of getting an IRS audit. For background, the tax agency in the past has been criticized for targeting low-income taxpayers earning less than $25,000 a year who presumably are easier to audit because they generally don’t have armies of accountants and tax lawyers. But the agency agrees with some others involved in the process that higher incomes raise the chances of an audit.
But the IRS maintains it is misunderstood―that higher reported incomes lead to more scrutiny. And they have evidence to support it. “Few things can generate as much taxpayer concern, confusion and controversy as an IRS audit,” admitted Deputy Commissioner Sunita Lough on the IRS website. She calls it a “critical compliance tool” and refutes the critics who charge it with targeting poorer payers. “Despite common misperceptions about IRS examination rates, the reality is that the likelihood of an audit significantly increases as income grows.” Lough cited a study that shows taxpayers with incomes of $10 million and above had substantially higher audit rates than taxpayers in every other income category for each calendar year from 2010 through 2015. Those with incomes above $1 million also had higher exam rates than all other groups earning less.
Advice from tax preparers
So area tax preparers say there is some truth to the IRS contention that taxpayers who earn more have a higher chance of being audited. The reason for the misperception is that taxes are complicated. One major reason is that they are not just based on income but have other factors. And for that reason and others are not easily measured, she said.
So what would get you flagged by the IRS? Among their various publications are “Tips for Seniors in Preparing Taxes.” Here’s one of the tips for avoiding a common error:
“When preparing your return, be especially careful when you calculate the taxable amount of your Social Security.”
So what else can you do to avoid an audit? There’s a short answer from Nassar Torres, CEO and owner of Torres Tax Services based in Lynn. He has 22 years of experience in financial matters starting when he was a teenager working for his father’s company.
“It sounds very simplistic, but the short answer is to be honest with the information that goes into your tax returns,” he said. “In particular, this applies to those who are self-employed or have passive income, such as rents, royalties, or investment income.”
“I do agree the most critical thing is to be honest,” suggested attorney Nelson J. Costa at the Wellesley-based firm of The Costa Group. “Report all items of taxable income and take all available deductions to get the best tax result possible.”
Both highly experienced tax experts stress making sure all numbers are correct. A factor that is not so often cited as a potential problem: If you are hiring a professional, make sure he or she is an honest one.
Naturally enough, tax preparers suggest using professional services. “Unless you know your way well around the relevant tax forms and applicable laws for your income tax situation,” Torres advised, “try to avoid doing your taxes on your own and seek the help of a professional. Either a CPA, Enrolled Agent, or other experienced tax preparer. This will ensure that you’re correctly reporting your income to the IRS and that you’re claiming the right deductions/credits to ensure that you’re getting the highest refund/tax savings possible.”
If you don’t use a professional, Torres is among those who recommend that individuals re-check results. “In those cases where a taxpayer has some experience preparing their own returns, it’s never a bad idea to occasionally run their returns past a tax professional before submitting them to the IRS,” he said, “to ensure that they’re accurately filling out their return. Tax laws change often and the limits on income and deductions/credits can change from year to year as well,” Torres warned. A seasoned tax professional will have their finger on the pulse regarding these changes and will be able to help you avoid any potential tax pitfalls and not miss newer credits/deductions that become available from year to year.
Costa agrees that re-checking your own or a preparer’s results is a good idea. So is meeting all necessary deadlines set by the IRS.
More reasons not to be fearful
There are two key facts to remember about an audit. First, correspondence audits conducted by mail accounted for just over 70 percent of the 2017 audits. Less than 30 percent of audits were the traditional face-to-face field audits that most taxpayers equate with audits―and fear the most.
Secondly, audits don’t always have negative outcomes, either. In 2017, there were 24,999 taxpayers who disagreed with IRS auditor findings―some came out ahead, though the odds were against them. The IRS said 24,000 taxpayers ended up forking over almost $11.5 billion in extra taxes. But almost 34,000 others received refunds for $3 billion dollars.
If you do get an audit report, the first thing to do to get over the shock. Don’t panic―if you’ve been honest.
You’ll need to get your records of income, claimed business expenses, deductions and others. To be sure you have all you evidence you need, you will need to have proof of the past three years, which is a general time period for the IRS. If you’re still worried, you can hire someone to be your representative. And there are procedures for appeals if the ruling is against you.
“When I was a teenager working part-time in my dad’s tax practice, I once heard the IRS be referred to as the most brutal collection agency on the face of the planet,” Torres said. “That remark made a lasting impression on me, especially because it was made in the context of the IRS being even more brutal than the Mafia!”
He thinks the IRS based on his present observations has made its fair share of mistakes in the past but is shifting towards a more “cooperative and gentler” agency, as shown by recent reports of taxpayer refunds.
“For now, I think taxpayers are still justified in having a healthy fear of the IRS. And that may not be a bad thing,” he said.
AARP helping to make sense of money matters in March (fiftyplusadvocate.com)
Tax credits possible for family caregivers (fiftyplusadvocate.com)
Massachusetts seniors may be eligible for circuit breaker tax credit (fiftyplusadvocate.com)