In recent years, the United States IRS (International Revenue Service) has been reducing its expenditures each year. The IRS has cut their budget again for 2017. It is $236 million less than in 2016 and $900 million less than in 2010. As a result of the funding cuts, the IRS has fewer personnel and resources at its disposal. This may have encouraged some people to claim higher deductibles or withhold reporting certain income, thinking that the IRS won’t find out. However, the IRS still conducts audits and might catch you if you try pulling a fast one.
As a Result of Less Funding, the IRS is More Likely to Go After Higher Income Earners
The IRS has 17,000 fewer employees than it did in 2010. IRS Commissioner John Koskinen shared at the American Institute of CPA’s National Conference:
“The agency estimates that $5 billion remains uncollected from tax returns that should be audited, but the IRS lacks the staff to do it.”
Although the IRS conducts fewer audits than they used to because they’re short on personnel, you shouldn’t be complacent about filing taxes. There are certain red flags the IRS looks for.
Simple errors are one of the reasons people get audited. Examples of these careless errors include incorrect social security numbers, typos, and calculation mistakes. You should double-check your tax return to prevent an unnecessary audit.
Due to limited resources, it’s no surprise that the IRS is more likely to audit high-income taxpayers. If you’re in a higher income bracket, then you must be even more careful to not make mistakes on your tax form or it could result in an unnecessary audit.
The most recent IRS statistics reports that 0.80% of individual returns were audited. Taxpayers who earn $200,000 to $1,000,000 per year have a 2% chance of being audited. Those who have incomes over $1,000,000 are audited at 10%.
Common Causes of an IRS Audit That Could Be Avoided
Another possible reason for receiving an audit is if your charitable donations are higher than average for your income level. If you have kept the receipts and proof of all your donations, then you’ll be fine. Those who haven’t held onto their receipts for charitable donations will have a difficult time with the audit. Get into the habit of recording proof of your charitable contribution as you donate.
For property donations, you should read “IRS Publication 526 – Charitable Contributions and Publication 561 – Determining the Value of Donated Property” to correctly enter figures from donated property. Miscalculating this type of donation can lead to an audit.
You should also ensure that you’re not including expenses that don’t qualify as deductibles. For example, you can receive business deductions for travel, automobiles, meals, and entertainment. But only for strictly business use. You shouldn’t include the costs of using your car for personal errands.
Some people think the IRS won’t notice if they include some of those expenses under business, but they often do. If your business deductions are abnormally high for the size and type of your business, the IRS may audit you. As with the charitable donations, business owners must always be prepared to prove their company’s expenses.
Being notified you’re under an audit isn’t necessarily a reason to panic. If you made an error while filling out your tax forms, then you could end up audited. Good record keeping is the best way to prevent audits and defend your tax forms in a potential dispute. Also, double-check your tax forms before submitting them. Typos or small errors can lead to an IRS audit. The IRS may have fewer staff members to handle audits, but you don’t want to be one of the unlucky people who get caught. As long as you’re honest on your tax forms and keep proof of charitable donations and business expenses, you won’t have much of a problem.
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