Chance of Audits: Lower Than Normal

Now that the tax deadline has come and gone, the time for audits is here. But what are your chances of having an audit this year? The chances are the lowest they have been in years. Last year the IRS only audited 1% of the individual returns, and this year they are expecting the numbers to go down.

Several things are causing this decline in audits. The biggest factor is budget. The IRS’s budget has declined from $12.1 billion in 2010 to $11.3 billion. This decrease in finances is attributed to overall budget made by Congress to help balance the budget. According to the IRS Commissioner, John Koskinen, there are three areas that can be cut, enforcement, taxpayer services and technology. Since technology upgrades can only be put off for so long, so to ensure the upgrades are made, enforcement and services are taking a hit.

With the decline in the budget for the IRS this leads to fewer agents employed to be able to conduct audits. With fewer agents, the IRS will be more selective on who they choose to audit. The IRS will still be looking at red flags that put someone at risk of an audit. Some of the red flags are:

  • Reporting less than actually earned
  • Earning more than $200,000
  • Making excessive deductions
  • Having extensive losses in stocks
  • Owning  your own business
  • Having accounts in foreign countries
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New Guidelines for Appeals

The IRS established new guidelines for appeals, and the phase one of the new approach has been regarded as the Appeals Judicial Approach and Culture (AJAC) Project. The goal of this project is to improve both the internal and external customers’ perceptions of a fair, impartial, and independent Appeals office.

The new guidelines provide updated information on how appeal cases are handled during Collections Due Process (CDP), offers in compromise (OICs), and the Collections Appeals Program (CAP). Many of the changes had already taken place, but there are still more that will be incorporated within the next year. The most significant of these will be the general update to the Internal Revenue Manual (IRM). The new policy will be the following:

  • New issues are not to be raised by Appeals; and
  • Appeals will not raise new issues
  • Appeals also will not reopen an issue on which the taxpayer and the IRS agreement upon.

In the past, the Appeals could raise a new issue if there were substantial grounds and the impact on the tax liability was material. This does not stop the taxpayer from raising new issues, only the Appeals. Even though they may not raise new issues, they may consider alternative arguments or new arguments that support the parties’ positions.

This is not the only new guideline. The IRS has issued new guidelines for Collection Due Process and Equivalent Hearings, offers in compromise hearing, and Collections Appeals Programs. There are clarifications to procedures, and how the Appeals should examine the cases to determine an outcome.

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IRS Collections Due Process Program and Collections Appeal Procedures

With the economic downturn in recent years, many taxpayers have found it hard to keep up with their income tax obligations. It is hard to recover when people are getting notices everyday and are feeling hopeless.  The IRS has two programs to help in the appeal process when there is nothing left but to lien, levy, or seize a person’s property. The Collections Appeals Program (CAP) and the Collections Due Process (CDP) are two ways a taxpayer has a chance to stop collection and appeal the process.

According to the IRS, taxpayers can use the CDP process when they have received one of the following letters:

  • Notice of Federal Tax Lien Filing and Your Right to Hearing Under IRC 6320
  • Final Notice-Notice of Intent to Levy and Notice of Your Right to a Hearing
  • Notice of Jeopardy Levy and Right to Appeal
  • Notice of Levy on Your State Tax Refund-Notice of Your Right to a Hearing
  • Post Levy Collection Due Process (CDP) Notice.

Taxpayer, who experience one of the following problems, has the CAP available for them:

  1. Before or after the IRS files a Notice for Federal Tax Lien
  2. If property has received a lien or levy
  3. If the IRS has terminated, proposed to terminate, rejected, modified, or proposed to modify an installment agreement.

The first step is to take action. Contact your CPA immediately. They can help you figure out which appeal process will work best for you situation. With immediate action collective activities can be frozen long enough to collect your thoughts and information. Request an “account transcription” form the IRS to be able to review all the transactions and outstanding balances for the account.

If the taxpayer chooses to go through the CDP process then there is 30-days from the initial notice letter to request a hearing. If the 30-day window is missed there can be a request for an “equivalent hearing”, but this will not suspend collection procedures.

The CAP hearing can be requested at any time, but cannot go on to tax court if the taxpayer contests the decision. The taxpayer can go on to CDP hearings, but only if they have not already pursued this option. By picking the right appeals process, the taxpayer and IRS can both can be happy with the results.

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Tax Audit Red Flags

Many people know that an audit is not typically a good experience, but what triggers an audit from the IRS. There are several red flags that the IRS look for when determining what tax returns will be audited.

The first red flag is foreign assets. Since 2009 the IRS has been increasing efforts to regulate offshore accounts. On Schedule B, a taxpayer is asked about ownership in foreign accounts. If they check the box but do not provide any information on the assets it will automatically trigger an audit.

The next red flag can be ex-spouses. Many time following messy divorces and ex can want to cause problems for the other spouse. They contact the IRS with information about the other spouse which may include money laundering, serious financial crimes, underreporting income, etc. Some of the claims are real and others are not, but they have to be investigated.

Too many zeros on a tax return will also be a red flag. It is ok to round to the nearest dollar, but not to the nearest hundred or thousand. It is unlikely that all the sums come out perfect, so too much rounding will cause problems.

Many times a home office credit will send up the red flag. The IRS is cracking down on home office deductions. The credit can only be claimed if your home office is the primary place of business and  used just for work.

Other red flags are miscellaneous income over $600 that was not reported; fishy tax deductions; earning over $5 million; say the wrong thing to the wrong person, even if it is a  joke, you never know who will turn you in; too much work-related driving; exaggerated donations; owning a business that is losing money; and unreliable tax preparers.

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