Cut IRS Audit Risk, Extend your April 18 IRS Tax Deadline To October 16

The IRS keeps secret what could cause your return to be audited (other than computer audits caused by omission of w2, 1099 or other items reported to the IRS separately from your return). However, after over 30 years of preparing tax returns and observing the results it does seem clear that extending your tax return using Form 4868 does appear to reduce your chance of audit.

 Several years ago an IRS agent confidentially to us that returns are audited in the order they are picked for audit (filing early or on time would cause your return to be picked first) and those filed later under extension are not as likely to be audited because the limited audit staff might not get around to auditing those returns filed undertension because they are busy with returns filed earlier in the year.

Read more in the Forbes article below.

Cut IRS Audit Risk, Extend April 18 Tax Deadline To October 16

If you have questions, are being audited or ? email us at ddnelson@gmail.com

9 Tax Return Items That Will Cause An IRS Audit

MONEY Magzine has a very good article if you want to avoid an IRS audit which is expensive, times consuming and very stressful.  If you get an audit notice make certain to get a tax professional to represent you.  Why?  Because if the IRS agents asks you a question when you represent yourself you may more may not answer it to your benefit.  If you have a representative, the Agent must ask your representative and the your CPA or attorney can always stall and tell the agent they must ask their client. That gives everyone time to craft the best answer and make sure the wrong answer is not given to the agent.   READ MORE HERE

Time Sets Forth Taxpayer Characteristic of Those Most Likely To Be Audited

Those most likely to be audited by the IRS include the following individuals:

• People who show more than $10 million in income or NO income at all!
• People who file International Tax returns and show International Activies on Their Return

The IRS is using various laws and other techniques to locate the  Seven Million Americans who live outside the US.  It appears that over half of those individuals are still not filing annual tax returns as required by law.  If you do file, you do not get doubled tax since you get credit for taxes you pay to foreign countries which directly offset your US income tax on the same income.

There are special reporting forms for US bank accounts, foreign corporations, foreign trusts, foreign partnerships, foreign mutuals funds, etc. Failing to file these forms can result in penalties of $10,000 or more and often the statue of limitations never runs out on the IRS's ability to audit your return if you fail to file these required forms.

Let us help you catch up and enter the programs which currently exist and may be terminated any day by the IRS which reduce or eliminate many penalties for failing to file or filing late.  Email us at ddnelson@gmail.com.  We offer all clients the absolute  legal privacy  of Attorney/Client privilege if required.  Don D. Nelson, Attorney at Law, CPA.

Time Magazine Article on Taxpayers Most Likely to be Audited

Where Are the Potential Tax Cheats - IRS List Communities Where The Cheats are Located

The National Taxpayer Advocate used confidential data from 2009 tax returns to identify clusters of potential tax cheats in more than 350 communities. The Internal Revenue Service assigns a score to each tax return rating the likelihood agents will collect additional tax money from an audit. The higher your score, the more likely you are to get audited.  If you live in one of the communities listed when you go to the attached link, it may significantly

increase your chances of aduit!

The study focused on sole proprietorships, which account for two-thirds of all U.S. businesses. The median scores for sole proprietors in these cities, towns and neighborhoods were among the highest scores in the country:

LIST OF TOWNS AND STATES WHERE IRS STUDY SHOWS THE TAX CHEATS ARE LOCATED ( LOOK AT IT TO SEE IF YOUR TOWN IS INCLUDED)

IRS Audits Drop, but Not on the Wealthy -Also more good news, Number of IRS Employees also drops

U.S. taxpayers were slightly less likely to face an IRS audit last year, according to an analysis issued Tuesday.

The IRS acknowledged that the number of audits of individuals dropped last year, but said examinations of taxpayers with incomes over $200,000 and over $1 million increased in fiscal 2012.

IRS audits dropped 5.3% in federal fiscal year 2012 to 1,481,966 audits of individual tax returns, based on IRS data analyzed by the Transactional Records Access Clearinghouse, a data research and distribution organization based at Syracuse University.

                                                              Read More about this in USA Today

WHAT ARE YOUR CHANCES OF BEING AUDITED BY THE IRS?

IRS has issued its annual data book, which provides statistical data on its fiscal year (FY) 2011 activities. The data book provides valuable information about how many tax returns IRS examines (audits) and what categories of returns IRS is focusing resources on, as well as data on other enforcement activities such as collections. The figures and percentages in this article compare returns filed in calendar year 2010 and audited in FY 2011 to returns filed in calendar year 2009 and audited in FY 2010. 

What are the chances of being audited? Of the 140,837,499 total individual income tax returns with a filing requirement, 1,564,690 were audited. This works out to roughly 1.1%, the same as the rate for the previous year. 

Only 25% of the individual audits were conducted by revenue agents, tax compliance officers, tax examiners and revenue officer examiners. That's higher than the 21.7% figure for the previous year. The 75% balance of the audits were correspondence audits, down from 77.1% for the previous year.

Following are selected audit rates for individuals.

• For business returns other than farm returns showing total gross receipts of $100,000 to $200,000, 4.3% of returns were audited in FY 2011, down from 4.7% in FY 2010.
• For business returns other than farm returns showing total gross receipts of $200,000 or more, 3.8% of returns were audited in FY 2011, an increase from 3.3% in FY 2010.0.
• For returns showing total positive income of $200,000 to $1 million, 3.2% of returns not showing business activity were audited, and 3.6% of returns showing business activity were audited. The audit rate for such returns was higher than the 2.5% and 2.9% respective rates for the previous year.
• For FY 2011, the audit rate for returns with total positive income of $1 million or more was 12.5%, close to forty nine percent higher than the 8.4% rate for FY 2010.

Not surprisingly, examination coverage increased for higher income earners. For example, the percentage was 1% for those returns with adjusted gross income (AGI) between $100,000 and $200,000 (up from .71% for FY 2010), and 2.66% for those with $200,000 to $500,000 of AGI (up from 1.92% for FY 2009). Exam coverage jumped to 11.8% for those with at least $1 million but less than $5 million of AGI (up from 6.67% for FY 2010). Similarly, coverage increased for those with at least $5 million but less than $10 million of AGI, as well as for those with AGI of $10 million or more.

Select audit rates for business returns were as follows:

• For all corporate returns other than Form 1120S, 1.5%, versus 1.4% for the year before.
• For small corporations with balance sheet returns showing total assets of: $250,000 to $1 million, 1.6%; $1–$5 million, 1.9%; and $5–10 million, 2.6%. For FY 2010, the percentages were, respectively, 1.4%, 1.7%; and 3%.
• For partnership and S corporation returns, the audit rate was .4%, the same as for the year before.  This would seem to make filing Sub S returns and LLC's which file partnership returns a good strategy to avoid audits.

Math errors on individual returns. Of the roughly 6.6 million math error notices that IRS sent out relating to the 2010 return, 49.5% were attributable to the making work pay credit (MWPC), which was a refundable tax credit based on earned income and was available to taxpayers in 2009 and 2010.

Of the total math error notices, 14.1% were for tax calculation/other taxes (which includes errors related to self-employment tax, alternative minimum tax, and household employment tax), 7.2% related to exemption number/amount, 6.1% related to the EITC, 6.2% related to the standard/itemized deduction(s), and 2.2% related to the child tax credit.

Penalties. In FY 2011, IRS assessed 28.75 million civil penalties against individual taxpayers, up from 27.1 million civil penalties assessed in the previous year. Of the FY 2011 assessments, the “top three” penalties in percentage terms were 58.6% for failure to pay, 25.6% for underpayment of estimated tax, and 13% for delinquency. On the business side, there were a total of 1,080,027 civil penalty assessments (down from 1,145,931 for the year before), and the “top three” penalties in percentage terms were 55% for delinquency, 24% for failure to pay, and 18.4% for estimated tax.

Offers-in-compromise. In FY 2011, 59,000 offers-in-compromise were received by IRS (versus 57,000 for FY 2010), and 20,000 were accepted (14,000 for the year before).

Criminal cases. IRS initiated 4,720 criminal investigations in FY 2011. There were 3,410 referrals for prosecution and 2,350 convictions. Of those sentenced, 81.7% were incarcerated (a term that includes imprisonment, home confinement, electronic monitoring, or a combination thereof). By way of comparison, in FY 2010, IRS initiated 4,706 criminal investigations, there were 3,034 referrals for prosecution, and there were 2,184 convictions. Of those sentenced, 81.5% were incarcerated.

The IRS Data Book can be viewed at http://www.irs.gov/pub/irs-soi/11databk.pdf.  IR-2012-36 can be viewed athttp://www.irs.gov/newsroom/article/0,,id=255853,00.html.