OK. So, everyone has finally filed their 2018 taxes.
What? You haven’t? Well, if you received a W-2 or a 1099, that is the absolutely most likely method to find yourself a target for the IRS. Because the system is designed to match every 1099 and W-2 filed with a tax return. And, if you received a 1099 showing you earned $ 20,000 in income- and you haven’t filed your taxes, you can expect a bill from the IRS for at least $ 4000. (You would receive a CP2000 Automated Underreporter [AUR] Notice from the IRS.) Not that you owe that much- because you probably have expenses to counterbalance that revenue – but because the IRS wants to scare the living daylights out of you.
On the other hand, if you (criminally) filed a tax return, alleging you had $ 5000 in expenses (and only had $ 1000), the odds are you would get away with it. Because the GOP has trashed the IRS budget (as I have written often), over the past decade. To the tune of 28%, so the audit rate has dropped from 0.9 to 0.5 percent. And, even those audits are rarely if ever done in person.
Contrast that to 40 years ago, when the IRS sent Agent Nicely (no, I am not inventing his name) to audit me and our businesses. That first day, he arrived wearing a three piece suit, crisply pressed, along with his briefcase. By day three (when he finally capitulated, annoyed that we had held back $ 2000 in legal business expenses because we knew THAT would flag an audit), he left with his tie and jacket (presumably) still in his luggage. And, approving a $ 600 refund to us.
Nowadays, if one were being “audited”, an innocuous letter arrives in our mailbox, with a series of proposed changes or a set of questions demanding proof of deductions taken. Back in 1998 (two decades ago), mail audits didn’t approach ½ the total audits effected. Now, the mail is used for ¾ or more of these audits.
It gets worse. These audits are not being effected for the rich. From whom it is widely acknowledged that the IRS could collect about many billions of bucks being fraudulently underpaid by these denizens. Some 70% of the tax gap (the differential between what is owed and what is paid) is among the underpayment/underreporting of the top 1%. Which leaves the US Treasury pretty light.
Instead, the IRS targets those poor (literally) folks who obtained an Earned Income Tax credit (EITC). Literally ½ of the audits last year covered these folks. Only 25 million returns indicated an EITC, with a total largesse of some $ 65 billion. And, that means 1 of 50 EITC grantees were audited. And, if the IRS collected 2% of the EITC funds, it would only amount to under $ 1.5 billion- and they don’t. [I do acknowledge that the IRS DOES audit those earning $ 5KK or more. Of those 3 million families when and if they are audited, the Treasury garners an additional $750 million. Moreover, back in 2011, 1 in 8 families earning $ 1KK or more were audited; last year, that audit rate was 1 in 31!] Of course, those whose living allows them to obtain an EITC aren’t the richest bunch, so it’s not surprising that only 1 in 5 don’t question the IRS determination (the demand for more money), since they can’t afford representation or don’t understand that the audit determination is simply a WAG (wild-ass guess) by the IRS.
If you do get audited, you should know that the IRS collects about 85% of the bill it sends out (overall) in these audits. (Hmm. I wonder about the validity of that IRS-claimed statistic. My pre-existing clients end up shelling out zip in 90% of the audited cases; about 1/3 or less for the other 10%. Those clients who hire us AFTER they get the notice range from zip to 75%.) And, as opposed to the field audit, the IRS ends up collecting an average of $ 85K when they do the (very rarely performed) field audit. (About 250,000 such examinations occurred in 2018.)
Remember- these audit figures are for individual tax filings. The audit rate for corporations is but 1% (and those audits collect about $1 million.). If you are a pass-through entity, your audit rate is on the order of 0.22% (1/5 the rate of the overall formal business rate) of all such entities- for a change of 1 in 455 such businesses. Even though the number of pass-through business has surged from 3.5 million to almost 5 million from 2005 to 2018 (38% increase).
Back in 2011, the IRS completed about 4 million audits; last year the number was almost the same at 3.9 million. (But, the population grew, so the audit rate is still much lower.) In 2011 the accuracy penalty was imposed on 58366 families; 606126 were hit in 2018.
Just so you know.
That’s horrible. I never realized the inequity of their approach to audits, or that they’d go after the low-hanging fruit, so to speak, and NOT after the individuals and corporations that could make a real difference in the nation’s tax collections.
Kind of reminds me of the time I was a “wanted woman” in Missouri – for a traffic ticket saying I was going “71 mph in a 55 mph zone,” when in FACT, I was going 64.5 mph (on cruise control, clocked later for over 3 hours for accuracy) in a 65 mph zone! (The limit had been raised, and the signage changed one week before. The trooper on duty should have known that, and I’m sure he did.) Anyway, when I called to argue it, the prosecutor told me they usually got “either ignorant citizen types who just signed the ticket and sent it in, or pragmatic attorney types who just signed it and sent it in, but never idealistic law students who wanted to fight it on the principle of the thing.” Boy, did that rub me the wrong way. They kept my uncashed check and a notarized statement of the facts for nearly 20 years, till the statute of limitations finally ran out. (It didn’t start to run till I moved to Texas. But the police here just laughed and assured me NO ONE would pay to “extradite” me to Missouri for a $64.50 fine I’d already, arguably, paid.)
Few people are brave enough to challenge the IRS (my Grandfather used to prepare others’ taxes and usually won when he did); most people just know the IRS took down Al Capone and don’t have the guts to try.
Holly recently posted..A Fresher Perspective
I have the reputation of protecting my clients’ interests. Because generally, I know that what was filed was accurate and correct. (Or, they would have had to go to another practitioner.) The filing may be outside the norms- but perfectly legit.