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How Does the IRS Pick Tax Returns to Audit?
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Doing your taxes is never fun. Even if you ignore how you must spend a couple hours filling out boring forms, finding documents, researching deductions, blah blah, there’s always the fear that you’ll be audited. I remember having the most vanilla tax returns back when I was a teenager, the 1040-EZ, and even then I was irrationally concerned about an audit.
The reality is that very few people get audited, just a percent or so each year (in 2010, 1.1% of returns were examined), and some of them deserve it. As much as we may like to think of the IRS as some cruel, emotionless monster trying to make the lives of hardworking Americans as miserable as possible, it’s not. They’re trying to collect tax revenue so the government can continue to provide the services hardworking Americans need.
How do they decide who to audit? It’s actually very straightforward.
In 2006, they published a page on the IRS.gov website that details exactly how they determined which tax returns to audit. It comes down to these four main ways (for individuals):
- Computer Scoring – Tax returns are “scored” using two systems – Discriminant Function System (DIF) and Unreported Income DIF (UIDIF). The Discriminant Information Function System (DIF) score gives the IRS an indication of the potential for change in taxes due, based on past IRS experience. The Unreported Income DIF (UIDIF), as you can imagine, scores the return on the potential for unreported income. The higher the score, for either, the more likely the return will be reviewed.
- Information Matching – This is an obvious reason because it’s the easiest to catch. The IRS receives the same W-2s and 1099s that you do, so it’s trivial for them to compare the two totals. If they don’t match, they investigate. Usually the investigation is simply a CP2000, rather than a full blown audit, because the problem is easy to catch and correct.
- Related Examinations – Beware who your friends/business contacts are! If their returns are audited and their return includes transactions with you, your return may be audited as well. The reason this makes sense is because if their return has a problem, the correction may involve your return. You may not be audited but you may receive a request for clarification.
- Potential participants in abusive tax avoidance transactions – The IRS may get information about promoters of and participants in various schemes and select a return for audit based on that information.
Most of the red flags you read about fall into one of the first two categories. For example, if you under report your income, you could trigger both the UIDIF score and the information matching reasons. If you participate in an abusive tax avoidance transaction and the guy who plans it gets caught… you’ll probably get audited. 
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If major errors are found, does the accountant ever take any of the heat. You always see celebrities getting busted but what about their accountants?
The system is self correcting.
You DUMP the accountant.
Bill Snider
Chris:
IRS makes it very clear that it is the individual taxpayer who is ultimately responsible for the information that appears on his/her tax return. If you hire someone (whether it be a CPA, professional tax preparation service, or your friend down the street) to handle your tax affairs, it is YOUR responsibility to understand what is being done on your behalf and to ask questions if you are not sure.
NCTaxPro is correct. And may I add, that most will pay for penalties if the mistake is theirs. The additional basic tax due would have been paid by you anyway, if the mistake hadn’t been made, so it’s generally bad manners to complain about paying a tax amount you already owed, but hadn’t paid due to a tax preparer’s error.
If it is a major error on the part of the accountant, professional liability should cover it and now there are rules in place so the accountant cannot claim “I’m just reporting what the client gave me and I did not know” the accountant can now be fined.
Everyone seems to try to wash their hands of anything that smells bad. The accountant will just say “I reported what the client gave me”, and the client will say “hey thats what I pay an accountant for. How was I supposed to know I couldnt deduct that”
Can you supply me with the information or which direction to go with this, “now there are rules in place so the accountant cannot claim “I’m just reporting what the client gave me and I did not know” the accountant can now be fined.” The EA that I used for 3 years attached all of my W-2′s and sent them into the IRS but failed to type in the numbers when preparing my taxes. When I receive the audit letters and talked to the EA about it she laughs and says” oops, I forgot to add that, oh well, you have to pay it.” she will not take any responsibility!! I supplied her with the information. SHe has made it quit clear nothing can happen to her. I understand I owe the money, but this is gross incompentency on her part. What can I do?
There’s also a big difference between “errors” and “fraud”. If you forget to include a 1099 for $100 in interest, the IRS isn’t going to try to throw you (or your accountant) in jail.
If you’re washing your money through some sketchy off-shore tax shelter, they may indeed try to have you both incarcerated.
On that same note of fraud vs errors. I hear friends that believe that they can’t be audited after X number of years thinking there is some SOL on fraud.
saladdin
Well, your friends are wrong. The normal limits do not apply to false/fraudulent returns. There is a specific exclusion related to this.
Good to know the reasoning. All I can do is put in the right numbers and hope for the best!
In the “IRS is not a cruel monster” topic, I’ve always thought of the IRS as a victim. They have to interpret and implement the tax code (very huge and contradictory) while minimizing the burden on the taxpayer (paperwork reduction act, et al.). They’re lucky if they can get that right, but I think they do a pretty fine job of it.
So, what, you’re saying congress is to blame?
That’s just crazy talk!
Crazy…but true. The IRS collects what Congress taxes.
You obviously haven’t been audited!
My husband and i opened a business at the end of 2000. We had already paid significant tax withholding from our previous jobs in early 2000.
When my accountant came back with our 2000 return which said we were getting a $50K refund we were ecstatic.
Such began our nightmare.
The IRS has three years to DECIDE if they want to audit you. I begged them to audit us so we could get our refund. No go. They waited for 3 full years, THEN audited us. It came back clean. They refused to pay out and RE-AUDITED. We had opened a business and badly needed OUR money back. I felt like I was in Kafka’s “The Trial”.
The IRS does not use faxes or emails and you cannot talk to the same person twice. I spoke with 50+ different people, with no added value. I had to repeat our story EVERY time.
They would not let me hand deliver documents to expedite our case (after 3 years!)
I now understand why some people crack. I almost did.
I’m confused… Why did you need to be audited to get your $50K back? Wouldn’t you be refunded automatically after filing your taxes in Apr 2001? Or is an audit required if the refund is over a certain amount? Sorry… this question is coming out of ignorance on my part, but I genuinely am curious!
Valletta – contact the IRS Taxpayer Advocate office.
These IRS employees are trained to take your side in tax disputes that get confusing.
http://www.irs.gov/advocate/
But what if your tax papers got runed? Do you know what too doo?
Thank heavens for some of the simple forms. Tax filing is terribly complicated for those who don’t get W-2′s, and I am glad not to count myself among them. Yet that is.
tbork84:
Tax filing isn’t necessarily complicated for those who don’t get W-2s, if they keep good records of their expenses against that income. And tax filing can be complicated for those who DO get W-2s, if they happen to do such silly things as exercise stock options or have the compnay pay them for child care expenses, and if they don’t realize how that income is to be reported to the IRS.
There is really no reason to fear being audited. It is simple really. If you take the time necessary to gather your information, all income, all documents, all expenses and all documents to support your deductions and you keep them for up to 3 years and some documents for up to 7 years. An audit can be painless. Be organized on the front end saves time and losts of your hard earned money on the back end.
I agree; I just fill out the tax forms with the thought of “what documentation would I provide to explain my claims” in mind and save that paperwork in my files.
The closest I’ve come to “audit” was a letter from the IRS that they came up with a different conclusion about a “hard to dig out the right numbers from ancient history” cost-basis from selling some stock that I got as a gift (thanks, dad!). I just paid a few more tens-of-dollars to agree with the IRS and nothing more came of it.
I hope I never encounter an audit!
coworker of mine was a 1099 freelance worker for our company for the past 3 yrs and never paid taxes. now he was hired full time in 09 and will HAVE to file this year with his w-2…that should be interesting…
Wait, he NEVER paid ANY taxes?!
Perhaps you should read Jim’s article, “How to Report Tax Fraud and Tax Cheats.”
It isn’t fraud or cheating. You obviously know very little about the definitions of words.
If you don’t file, what are they going to audit?
If you don’t sign a document of any kind, you have no contract obligation.
It’s not fraud or cheating unless you file with known bad information.
Tax evasion is illegal, tax avoidance is not.
Holy Cow, you couldn’t be more wrong… Not filing a tax return is in fact illegal! Ask Wesley Snipes. I am sure I can find the number for McKean Federal Correctional Institution somewhere on google.
Not so for really low income people.
However it is for all others.
Bill snider
So Wrong… The IRS collected something like $2.3 TRILLION in taxes last year (http://www.irs.gov/pub/irs-soi/10db06co.xls). Debunk that…
Interesting article…just need to keep out of the “toxic waste”.
In Canada, the audit process is risk based. Those who have the greatest opportunity to make mistakes that are significant are more likely to be audited. The risk base also targets certain industries: i.e. construction trades people.
Now there are fewer deductions available here and the typical person receiving employment income will probably never get audited since there are few if any discretionary deductions.
The message to anyone who files a tax return, make every effort to learn and understand what you are doing.
Bill’s spot-on. If you’re hiring a pro, and you don’t understand something, ASK! It’s YOUR butt if the IRS comes calling.
Just figured I’d post about an instance where I was the benficiary of a review by the IRS.
You may all remember the 2nd Bush tax cut from 2008? Well, my wife and I got our refund check so early in the process that, when we were doing our taxes for that year, we had no idea that we were due an additional refund for our child….who was born about 8 months after we got the first refund. We had no idea we were even eligible. No idea, that is, until about a week after we filed.
So, I got down to preparing to file an amended return. That, however, became unneccessary when I checked my account one day and found that the IRS had already sent me an additional amount to cover the refund that I hadn’t even filed for! They had automatically reviewed my return and saw (perhaps automatically) that I was actually owed MORE of a refund. Saved me a lot of time that I would have spent filing an amended return.
A-U-D-I-T… makes a very cold chill down the spine.
We were audited for the year 1962. Our second child was born in early 1963, but since the doctor/hospital predicted costs had to be paid in advance (I don’t think they do that anymore) they were paid and claimed in 1962. There was not an additional child claimed for that year.
Give the IRS credit for this one: in checking our receipts, they found some that we hadn’t claimed and our return was increased. We didn’t get the check until November, but it was for more than we had claimed.
I heard through the rumor mill that having a home-based business is a huge red flag for auditing and having the IRS come knocking at your door!
Having a home-based business isn’t a red flag in and of itself, but the deductions you take can lead to an audit.
I’ve had a home-based business for 3 years now, but I don’t claim a home office because the room is also used for other activities. I also share some items between personal and business use and can write off a portion, but not all of those items (for example, printer, computer, etc.).
If you use a dedicated office you can deduct the value of that room (either rent or home depreciation) as well as a proportion of your utilities related to the size of the room.
Obviously the more deductions you take and the larger they are, the more likely they are to receive attention from the IRS. Just keep receipts of everything and run it through the smell test before including it on your return. If it sounds sketchy, clear it with an accountant first, otherwise leave it out.
Jim that’s for the information. I always find that you do great thorough research. I never knew what the process was, this was a very enlightening post.
“They’re trying to collect tax revenue so the government can continue to provide the services hardworking Americans need”
so your sayin the government can spend your money better than you can
It’s hard for an individual to pay for services like police and fire on an a la carte basis. As you race out of your home during a house fire, do you want to remember to get your credit card so you can pay for the fire truck? Do you get one truck? two? How many firemen/women do you want?
It’s an absurd scenario but a potential alternative to the one we have now of taxation.
If your house is on fire then you call the fire department to put out the fire. Once the fire is extinguished then you pay the fireman $200 or $400, its small price to pay for savin ur house.
The people who commit crimes should pay for the police. If the police can catch the thief then he gets paid if not then he doesn’t get paid.
As for schools, people should pay for their own kid’s education. If they can’t afford to pay then they should not have kids, birth control.
There is no difference between taxing money from people and stealing money from people.
If no one paid any taxes that supported, say, fire departments, then the cost to extinguishing a blaze at your home wouldn’t be a mere $200-$400. How, exactly, is that going to pay for all the training, gear, supplies, housing, salary(including hazard pay), etc… for the fire fighters?
No, without looking at the numbers, I think that might come to more like $50,000-$100,000 per fire. Maybe I’m overestimating, here, but the point is that the marginal cost of putting out a fire is WELL in excess of what any sane person is going to want to spend to have it put out on their own.
No, rather, these services act a LOT like insurance. We all pool our resources so that, heaven forbid, if we need them, they are there in a well-maintained fashion, to help us out in our time of need.
Bottom line, feel free to pull out of the system, but don’t expect anyone to come running with anything more than a bucket if your house is on fire and you’re only offering a couple hundred dollars to cover the cost.
While it is true that, “the ability to tax is the ability to kill,” the argument being made here is a little ridiculous.
I pay property taxes for education and fire. I had a flood in the area, the local fire department told me it would be 2 days befroe they could pump the 30″ of water out of my basement. I had to hire a plumber so much for the government providing services.
I saw a story a few days ago, but can’t find it now (but will keep looking). What most people don’t know is that when you have a house fire, your insurance actually pays for the fire fighter services (at least here in Texas). The story I was looking for was of a Texas family that got a bill for $17k for the services rendered when their house caught fire and they didn’t have insurance.
I agree with David! I would also like to add that any deductions for children ages K-12 be removed as well as child care. Why should the parents get a tax break yet use the resource? If you cant afford to pay the price dont have a child.
If you really want to stir the pot lets add a tax for persons with children in public school. A schooling tax. the Govt. adds say 2K to your tax bill for every child in public school. If you do home school or private school you dont pay the schooling tax but you also dont get a tax break. There would never be a problem with funding for schools!
I also think the prison system could benefit if the prisoners had to pay for there stay in prison! They earn there money by working. There wouldnt be one pot hole in any street and our roads and highways would be spotless of liter!
Bill, I make $25 hour and I have hard times covering all my family bills (my wife does not work, two kids), I understand your point, but people with low education or unemployed also have the ethical right to rise a child, kids are not just for rich people don’t you think?
public schools is what allow people coming from low income families to get a better life (example mr Obama)
About the prisons, system make the prisoners work, it’s just that security and legal cost are quite over what they produce
so if an airplane hit your house who pays?, the terrorist that took the airplane, the airline, the government?, the home land security, your insurance, the pilot? that’s the kind of situation when taxes and government are welcome
Bill, I’m thinking that if we gut educational funding support even further, the prison population would explode.
According to your logic, I’m assuming you’re either wealthy or childless.
But I’m glad that you and David agree with me that the Pentagon budget should be eliminated!
What a load of nonsense… the fire department doesn’t even save the *house that’s on fire*… they save the *neighboring houses* from catching fire by extinguishing the one that’s burning!!!
So, with your logic, the neighbors are the ones who should shell out the cash to pay the firemen. Why should I even call, when my house is already toast?
And who would pay to put out brush fires started by lightening, which threaten entire neighborhoods and towns?
Incidentally, although we pay small taxes for police, people who are *caught* for crimes generally face financial penalties in addition to any other penalties and loss of freedoms, which is direct revenue for the justice system. Bail, for instance: Parking Ticket? $60 Speeding Ticket? $150-300. Stealing? $500+ Drugs? $2k-10k+ Murder? $1M seems to do it. Jail inmates are often used as cheap labor to provide revenue for the jails, and let’s not leave out those monthly payments for probation and parole supervision… so YES, caught criminals pay for crimes, lazy police departments get less revenue, and quiet areas have tyrannical police who would otherwise be revenue-starved and lose jobs (Re: speeding tickets in small towns! Incarceration of non-violent drug offenders!).
How would we pay for highways without taxes? Should every road be a toll road? Seriously, *every* road?? What about the plumbing systems, drainage systems, tornado/hurricane sirens? Would you throw away parks? Art museums?
Who would educate the poor about birth control, in your scheme (duh, the uneducated are the least likely to know anything about it)? Who would pay for non-commercial scientific development which brings better understanding of nature… like the kind that comes up with understanding about birth control and nutrition, disease *prevention* (rather than prescription drugs)? Who would pay for even a small army for defense?
Are you offering to foot the bill on these things personally? I’ll happily take a refund check from *you*, if that’s what you’re suggesting.
Wow David…Just wow….
And what if the last time you needed the police you were short and could not pay, do they ignore your call the next time because you still owe them?
saladdin
Jim, in all fairness, I laughed when I saw that statement too. Keep in mind that the IRS collects federal taxes. Local taxes pay for fire/police. Federal taxes are generally taken from hardworking Americans and given to those who don’t work. With the exception of national defense, we receive few “services” from our federal tax.
few services as, emergency funds for disasters, defense, laws, and billions for the financial meltdown crisis relief, unemployment, etc a million of times, I’m not saying that the government is perfect using the federal taxes collected but is the smaller pain, we should be talking instead about what’s the best way to wisely use those funds back to the people
Let me correct my comment…
“We receive few services allowed by the Constitution beyond national defense.”
LOL
Taxes pay for roads, schools, etc. Do you drive? Even if you don’t have childen in school, it’s ignorant to suggest the U.S. downgrade the public school system. Education is the key to our future (the entire country). If you would prefer to pay less taxes and live in an uneducated society, maybe you should consider moving to another country.
My comments were specifically about “federal” taxes – not local.
With the exception of the Interstate system, local taxes pay for roads. I would classify the Interstate as “one of the few services” I mentioned above, and it rightly falls under the Commerce Clause of the Constitution.
There is no constitutional authority for the federal government to be involved in education. Historically it has always been paid for by local taxes (primarily property tax here in Colorado). It is not a “service” the federal government provides.
In addition to the previous comments, it may be of interest to you to know that over 70% of all firefighters in the nation are volunteer firefighters. While taxes still cover the purchase and maintenance of equipment, salary and benefits for a chief and for training, the onerous costs associated with unions, pensions, disability fraud, etc. are not an issue for most of the nation, who pay much less in local taxes as a result.
I live in a rural area. There is some type of “fire ranking” for insurance that having a volunteer fire department lowers which means lower premiums.
saladdin
The Subject is about IRS audits, not local taxes.
The IRS does not collect any taxes for police and fire. That is done by the state.
Your: “alternative to the one we have now of taxation.” is also false because, again, the taxes you pay the IRS does not go to any of these services.
Why does everyone think their roads, and schools, and police and fire, etc. are paid for by the Federal Income Tax? Roads are paid for by gasoline taxes, schools police and fire by property taxes, plus a bit of added on sales tax.
The federal government gets most of the money in some cases, and spreads it around more evenly, after they take some for deciding who gets what, but still, the income tax does not pay for any government services.
Notice you pay the IRS, but refunds come from the Treasury. If you follow the money, you will find that the income tax goes directly to pay the interest on the national debt.
I have researched this extensively, and debunked every belief that you get some ‘service’ for this money. What the IRS collects from the ‘graduated income tax’ (they collect taxes for other things too) does not even cover the overhead of running the IRS. What that means, is that most of us pay the IRS for beating us up for the money, and nothing more.
Think about it.
One other note. The Income tax is not a tax on income. Yup, cause that would be unconstitutional. It is a tax on certain activities that are controlled only by the federal Government. The amount of tax paid for this is based on your adjusted income.
If you work, say in AZ and live in AZ, nothing you are doing is a Federally controlled privileged activity.
But, they get away with it because everyone is told they have to, and hardly anyone ever looks to see if it true. The courts also go along with it under federal pressure, and juries will find you guilty out of embarrassment to admit they have been swindled for years and want to get even with you because you didn’t pay your fair share of the extortion money.
CPA’s are licensed and “tax accountants” are trained by the IRS on how to collect the right amount of money, should you chose to pay it. They never get schooled or learn where the law says you are liable. Why would they?
I like to think of the average person paying the income tax, as being under mass hysteria.
Under the influence of ignorant peer pressure.
But don’t get me wrong, if you choose to pay it, for what ever your reasons, go ahead, and be sure you do it right, because your signature on a 1040 is a legal contract to voluntarily keep paying accurately.
Say Hi to Richard Hatch when you see him in prison…
The IRS collected $1.1 TRILLION DOLLARS last year in Individual Income Tax… You saying that entire amount went to the National Debt??? I think it would have been paid off by now if that were the case.
Also, I am a Tax Accountant and I never received any ‘IRS Training.’ Must have missed that class in college…
The income tax does not pay for any government supplied service except to beat you up for the money. If you think otherwise, you are ignorant. If you think I am wrong, then reply and I will correct your ignorance.
You are wrong…
It’s always scary of the thought that you may get audited. At least it’s pretty refreshing to know as long as we are honest on our returns there is only a small chance of still getting audited.
As a tax accountant I come across a lot of folks who just think they know what they are talking about. My job is to take their word if they say that they have a receipt/documentation to support their claims. That is one reason we make them sign the tax return.
I see lot of taxpayers blaming their accountant and tax preparers for being audited but it is really not their.
Don’t shoot the messenger and stop thinking that IRS is stupid.
“That is one reason we make them sign the tax return.”
The other reason being that it is required by law?
Jim that’s great info, thanks! But where were you 3 years ago
I was audited for capi gain, even though it was reinvested. Guess I missed couple of items 
Process wasn’t as bad as I thought it would be.
I agree with billsnider! The best thing you can do is understand your personal tax situation and be organized with your documentation.
Jim – great post – thanks!
I get audited every year, like clockwork. Last year I was audited on 3 different aspects of our return. I live in Canada but I bet the procedure is the same. I don’t even get scared anymore. I know I haven’t done anything intentionally, and I am really careful so I don’t make many mistakes. They are wasting a bunch of time on me. But so be it, it is their time to waste.
My dad was a sculptor and worked many small teaching jobs in any given year, besides selling sculpture. He had a tax guy do his taxes one year who set up his equipment purchases on a depreciation basis. A very bad thing. He was audited, had to pay huge penalties, and still was clueless as to what happened. So the upshot is, if you’re severely right brained, and if someone has to do your taxes for you, find someone who’s familiar with the ins and outs of your particular field.
There used to be a condition that the IRS would automatically audit you if you took too many deductions on your W4 (like 10+) – companies were forced to send in your W4s to a different dept for verification.
i’m getting a $4-6k return every year despite filing married 10 due to high home mortgage interest, kids, and charitable giving. can i safely up my withholdings even further, or does the auto-audit flag on withholdings still exist? and if it does, what is the level?
I have had my deductions set at 15 on my W4 for years, but because of kids (only 4), charitable givings, etc., I still get a small return each year. I do that so I keep my money throughout the year, and not give the government an interest-free loan. I have never been audited.
Actually, the condition is that your company may have to send in your W-4 for review if you claim more than 9 exemptions (http://taxes.about.com/od/preparingyourtaxes/ht/W4.htm).
Also, there’s a limit on how many exemptions you can claim. I think it’s 12, and for everybody (I think) that will make it where no tax is taken out.
If you get a return that is that large every year, you probably need to file for exempt status.
Brandon:
You can only get exempt status if you have no tax liability at the end of the year and don’t expect to have any the following year. When you get a refund, it means only that the amount you had withheld during the year exceeds the amount of your tax liability; it does not mean that you had no tax liability.
NCTaxPro:
I understand that, but if Peter is getting a $4k-$6k return every year, then it might be something that he wants to look into.
Here are the relevant instructions for a W-4:
Note. You cannot claim exemption from
withholding if (a) your income exceeds $950
and **includes more than $300 of unearned
income (for example, interest and dividends)**
and (b) another person can claim you as a
dependent on his or her tax return.
If Peter is getting a refund of all of his Federal income tax every year, then he could file exempt. He’ll just get a smaller refund.
http://www.irs.gov/publications/p505/ch01.html#en_US_publink10007250
Brandon:
You missed the other relevant part of pub 505 at the same link:
“You can claim exemption from withholding for 2009 **only if both of the following situations apply**.
For 2008 you had a right to a refund of all federal income tax withheld because you had no tax liability.
For 2009 you expect a refund of all federal income tax withheld because you expect to have no tax liability.”
No tax liability means that your gross tax due is zero *before* your withholding is taken into consideration. For most people, that’s not the case – if they had no taxes withheld they’d owe.
NCTaxPro:
But wouldn’t you also need to take any applicable tax credits into account?
This is the tax code we’re talking about, so it’s supposed to be complicated.
It just makes more sense to me to use the equation
(Tax at end of year) – (Credits) = Tax liability.
Then, if your tax liability is less than or equal to 0 for the previous year, and it will be 0 for the current year, then you can file exempt.
just to clariy – i am not exempt. my total tax withheld is double my refund – i’m not being refunded everything, just a good, healthy amount.
There is no statutory limit on the number of withholding allowances that you can claim on a W-4. However, the IRS can review your W-4, and very likely will if you are claiming more than 10 (single) or 15 (married). If the IRS determines that you are claiming too many allowances, they will send a letter to both you and to your employer. The IRS will order the employer to withhold based on the martial status and number of allowances specified in the employer’s letter. Furthermore, the IRS will instruct your employer to ignore any W-4 that you submit unless it results in more withholding than specified in the letter. You are allowed to dispute the IRS’s determination.
The IRS provides a worksheet with the W-4, and it actually works pretty well in estimating the number of allowances that will bring you close to a zero-balance situation.
Brandon:
If line 60 of your 1040 – total tax – is zero this year, and is expected to be zero next year, then you can file to be exempt from withholding.
NCTaxPro:
Awesome, thanks for the clarification.
I was sent an IRS audit notice about 2 years ago. Apparently I did not report some of my many stock transactions. I was given 30 days to refile, pay the additional amount owed and penalty fee (forgot exactly how much but it was a percentage of the tax owed.)
Fortunately I signed up for the audit defense so I just had to hand over my statements to the tax accountants and they handle all the paper work and dealing with the IRS on my behalf. Everything on my side was done via phone calls and emails.
My $50k full time job changed during the middle of the year to a part-time, $20k job. My boyfriend has been helping me financially with everything I can’t afford. In addition, last year I filed a 1099 but won’t this year because I didn’t get paid for any freelance work. Due to the difference does anyone this I’m more susceptible to an audit?
Everyone has the right to kids as long as they can afford them. Daniel, $25/hr with two kids and a wife that doesn’t work means you probably should have pulled out once or twice.
Dave your comment is rude, off topic and senseless. this conversations was about tax deductions and tax audits.
People used to have families and kids before this financial crisis, they did not expect that one of them or both were going to be unemployed for long periods of time having a good resume, that happen to more than one wife or husband in this country, tax deductions play and important role in the relief of those situations.
you are lucky guy since is clear that you don’t have those troubles, and because your parents can not get back in the time, imagine all that tax returns that they could save to our country just following your advice and having your father pulling it out once or twice
Steve, your comment is off-topic and quite frankly disgusting. To suggest that people with lower income “pull out” and not have children of their own is pigheaded and discriminatory trash. My husband and I have 3 beautiful children, whom we both have worked hard to support with NO help from government agencies such as welfare, even though I am sure we would qualify now that he got laid off from his job. How dare you sit up on high and look down your nose at those of us who have been violently shoved in to hard times and just happen to have kids. I hope your mother never hears of this post, else she might have a fleeting thought of what would’ve happened had your dad “pulled out”, if she hasn’t already! Jerk! And to anyone else that believes procreation should be for the rich, let me ask you this: Has your family always been rich? If not, then maybe some of you should’ve never been born? See my point yet?
Kat, although Steve is pretty crass, there is a point he’s making that’s valid. Whether rich or poor, a couple should be responsible for any children they bring into this world and not rely on the government to take money from other people by force and give it to them.
From your response, it appears you’ve been responsible. I also have no reason to believe Daniel is irresponsible.
Those that fall upon hard times through no fault of their own should turn to family, friends, church, charities, etc. The government should not be the solution to such issues as the government is not be a charity. Remember, whenever the government gives you (or anyone) money, it’s not pulling it out of thin air… it’s TAKING that money from someone else who worked hard to earn it.
NewPerspective, I think you nail it, I work hard to feed my kids with no regrets at all, responsibility it’s the key and I’m intending to rise my kids on that core value, still I think that public education it’s a must be (people must learn to fish instead of beg for food), and I agree 100% with you when you said that “it’s hard for an individual to pay for services like police and fire on an a la carte basis”, I just bite the bait with the idea to make criminals pay for their tuition, security and custody what I think is just silly
I received a 1099 misc. statement that has the amount listed as #3-Other Income which is normally for winnings…I thought, but it should be earnings.
I think I should put it on a schedule C like my other 1099s that are listed as #7-non-employee income…does it matter what business the 1099 comes from?
Should I just lump all the 1099s together on a schedule C?
Kim:
Amounts reported in box 3 on a 1099-MISC are not normally subject to SE tax and should not normally be reported on Schedule C; they would ordinarily be reported as other income on line 21 of Form 1040. That said, if the issuer paid you for providing goods or services for which you typically receive a 1099-MISC with the amount reported in box 7, it’s likely that the issuer made a mistake (you’d be surprised home many people don’t know how to fill out 1099-MISC) and I would report the income on your Schedule C. The issuer should also issue you a corrected 1099-MISC.
Thank you.
I do freelance work and this work was for a gaming website that awards money to players. I just didn’t want to get audited because the of the type of website it was.
I’m a CPA and my taxes challenge me to think. I just dont know what the rest of the world does. I’m not a “tax” CPA, but I know all the basics and it just seems too confusing for the common person.
I have already filed through TurboTax (always use it) and my refund of $1,392 has been deposited into my bank account from the IRS.
Does this mean I won’t be audited this year or is it irrelevant. Not worried, just don’t want the hassle.
Thanks
It depends…….
We don’t know much about you. You could have omited a bank 100-int or you over estimated your quarterly payments.
bill Snider
Danny:
It is irrelevant; there is no guarantee that you won’t be audited on this year’s return even if your return was accepted and your refund already deposited.
Does the irs compare taxes from year to year, on corporation taxes, under 12,000.00 a year?
If they do, it’s integrated into their algorithm and they don’t say so specifically.
I am so upset.When we owe the IRS they take it ASAP. Now I did my taxes this year again as usual at jackson hewitt, and the IRS website and when I called the IRS. They have been telling me my refund would be in my account on March 16 2010. Well it is the 17th and it is not there. I called today and finally got someone. They said my refund has been in the Error resolution unit for 25 days.. Hello, why wasn’t I told this 25 days ago? I did the first time home buyers and I am head of house hold. Jackson Hewitt said they mailed all the forms in and my closing papers in. I am so confused.When I called the IRS today, the cust. serv, can not even tell me why it is in the error resolution unit. They said it says I will receive a letter in 2 weeks. What is the error resolution area? Do they do Audits? I wonder if me getting married on jan 3 10 has anything to do with it. My name is hyphennated on a lot of things, cause I had not got everything changed over by the time I did my taxes. But that should not matter should it? I asked Jackson Hewitt if they wanted a copy of my Marriage License, and they said no. What is going on? frustrated
I have that same problem. I filed my return in January. After about 6 weeks I checked the “Where’s My Refund” section and it showed up. Then I checked the next day and it was gone. When I called after that I was told that there was nothing in the system and I need to re-file. I called today and was told that my tax return was in the error resolution unit for the same credit. I was also told that according to the system it took almost 2 months before my return was even received. I filed a second return and the gentleman helping me told me that could cause additional delays in processing (up to 15 weeks)!! What the heck is going on there?! I filed in advanced. It almost sounds like anyone who filed that credit is in that unit for review. Let me know how yours turns out.
can the irs audit you and after they investigate and say your good to go, then audit you again
If their algorithim says yes, why not….
Bill snider
I need to submit a 1040x to fix/switch from a Itemized deduction to a Standard deduction. Some of the documentation could not be found for my Itemized Deductions. After doing the 1040x, I owe about 100 dollars more then what the IRS already took out of my account. Do I just need to include a Check for the difference along with my 1040x when I mail it in, or do they send me a bill and I pay it then??
Hick:
Yes, you should pay the difference with your 1040X – and then the IRS will figure the additional penalties and interest you owe and bill you for that.
WELL I GOES LIKE THIS. I WAS 21 WHEN I HAD MY DAUGHTER. I WAS STILL LIVING WITH MY PARENTS WHO WAS RENTING THIS THREE BEDROOM APARTMENT. WHILE I LIVE WITH MY PARENTS, I PAID MY FAIR SHARE OF THE RENT. COME 2010 I MOVED OUT OF THEIR APARTMENT AND GOT MIND. WHEN THE IRS AUDITED ME, I WENT BACK TO THE RENTAL OFFICE OF MY PARENTS APART TO GET PROVE THAT MY DAUGHTER HAD SPENT AT LEASE 6MONTHS OF THE YEAR WITH ME BUT THEY REFUSE TAHT I NO LONGER LIVE THERE. THE IRS WANTS PROVE OF RESIDENCY AND THE APART IS REFUSING BC IM NO LONGER A CUSTOMER. WHAT IM I TO DO.
Do you have any rental recipyts or bills addressed to you? Ditto for other such stuff like bank statements.
Bill Snider
my house burnt last year. I have no idea how to get ahold of the tax forms that were sent to me that were also sent to the irs. I have lost 1099′s and only God and the irs know what forms I was sent that I am supposed to use on my taxes.
Is there a way to find out shy of actually doing my return without them and then being audited by the irs because they weren’t listed.
I would suggest that you contact the IRS and tell them about your problem. Everything will work out in the end. The idea being that you don’t want to surprise the IRS. Get them to help you.
Good luck and I understand your pain. It once happened to my daughter.
Bill snider
Me and my husband are legally married but had been seperated for about 5 yrs and had been filing taxes on our own as Head of Household, which gave me the EIC because I made less money than him. After reading some info on how taxes are suppose to be filed it’s got me worried we’ve been getting credits we aren’t entitled to. If we start filing jointly again will this put us in serious trouble with the IRS? Please HELP!!!!
Any suggestions on how to fix our past returns?
If you think made a mistake on a past tax return all you need to do is file an amended tax return for that tax year. It’s no big deal.
The article tells us there is a score that the IRS uses, can we log onto their site and see this score to see if we have a higher or lower chance of being audited?
I’m afraid you can’t.
If they showed everyone their number that would be a bad idea. So many people would try rolling the dice on their taxes if they had a “low” audit risk number.
Weird situation, my friend just had a new born about 2 years ago but she got laid off from work and her unemployment checks stopped after the kid was born. So to help her out couple of us offered to give her $80/month if she come over and clean our house every other saturday. Because she reported the extra income the IRS now is auditig her and wants verification of the income. No big deal, but one of our friends is currently being audited for something else so because I am on the list of employers helping her out will I get audited too?
You are wrong, they do not collect taxes to help the working man, the collect it so all the people coming into the USA get everything for free, they are called free loaders. Time to stop it and really help our working people.
LOL. I’m sure your ancestors had millions of dollars when they came to this country and never needed any help from any kind of governmental agency.
Interesting summary of what goes into the algorithm.
I have been audited three times in the last 10 years. Twice due to bonuses that the IRS questioned and once due to a stock transaction which I somehow recorded as futures transaction.
agreed. i never really had a clue how the process worked. i can’t say that i had as much interest by the IRS as you did alan, but i did have one problem due to an error on my part. it was a fairly painless process.
Everyone I know shudders at the very word “audit.” A friend of mine did get audited, and lost — and she appealed. Not only did she win her appeal, the IRS agent pointed out a couple of other deductions she could be taking.
Although the experience was nerve-wracking, it had a happy ending.
That said: I hope I never get audited.
Our C.P.A. firm is handling our first ever audit with the IRS. Previous C.P.A. at the firm left early this year. New one is now doing our stuff. Just found out the old one made several errors on 2008 and 2009 returns. Looks like (after 5 months of waiting for the final report from the IRS) we will be owing 20% interest and 20% penalties even though we had all of our documentation and explainations to the old C.P.A. She just didn’t do it right. How can we protect ourselves if we know nothing about tax code? We pay over 300/month to this firm to do our accounting. First audit in 32 years. She also claimed our ROTH contrib. as an 401k one. Big mistake on her part. This is a nightmare. We are now looking at over 6k in backtaxes and 4k in interest and penalties. There needs to be some responsibility taken by the C.P.A.’s.
my friend who main citizen is on sepain n he work in germany..n the tax officel make a mistake…his name is PIT not BIT, SO their mix up the account in tax and stolen all his $$ house,shop..to sAID HE DIDNT PAy THE TAX..HE PAY TAX IN SPAIN and never own any single sen in german…how can this be happen..and it take how long to get back the refund if he win the case??really a big mistake..ndo u think the govt willbe in trouble since their already sell his car,house n etc n said only give him 20% of d value..
THE IRS AUDIT TAX RETURNS TRUE ENOUGH THEY ARE AUDIT FOR MISTAKES THAT HAS BEEN MADE AND SOMETIME EMPLOYERS MAKE MISTAKE BY NOT HAVING 1099 OR W2 READY IN TIME FOR TAX SEASON. USING YOUR LAST PAY STUB IS’NT A GOOD IDEA EVEN THOUGH IT SHOULD BE CORRECT MOST ARE ‘NT CORRECT YOU WONDER WHY! BECAUSE EMPLOYERS OFTEN CHEAT THE IRS ON THE TAXES THAT NEEDS TO BE SENT IN ON A QUARTERLY BASES AND THIS WILL GIVE THEM ENOUGH TIME TO CORRECTED WHEN BUSINESS ISN’T WHAT IT SHOULD BE OR THAT THEY HAVE ENOUGH MONEY AT THE END OF THE YEAR. IF THIS IS INCORRECT THE 1099 OR W2 THEN AN AMEND RETURN SHOULD BE DONE. I HAVE MANY CLIENTS THAT MAY HAVE THIS ISSUE THAT COMES TO ME IN REGARDS TO THIS AND GENERALLY THERE IS SOMETHING THAT THE OTHER TAX PERSON MAY HAVE MISSED AND IT CAN BE CORRECTED. SO BE VERY CAREFUL WHOM DOES YOUR TAXES AND MAKE SURE THAT THERE EXPERIENCE IS WELL KNOWN.
the irs decided to do an audit on me for the year 1999 just this past 2009 , the year 1999
was paid in full in 2008 because of some problems. why did we wait so long ? there were some theft cercomstances at the cpa office which resulted in the distroyedment of
our records , anyway we managed to do an estimation from previous years advised by our
irs agent who at the time was working with us
now they are threatening to take my home my question is can they do this after the year has been paid in full and is the audit legit
what can i do to have them erase this ridicules tax lean for this year i have proof of the tax lean release for that year when i paid it in full.
thank you texas