Sunday, February 28, 2016

Tax season brings fear of audits

Tis the season for taxes, as millions of Americans are filing for returns between now and April. But for some, this time of year also comes with the dread of a possible audit from the Internal Revenue Service (IRS).
"There's an urban myth that the IRS is some kind of Gestapo and that's simply not the case," says Donald Williamson, a certified public accountant with three decades of experience and the Executive Director of the Kogod Tax Center at American University in Washington, D.C.
According to the most recent data from the IRS, the odds of being audited are extremely low. In fact, it was less than one percent for middle income earners who filed in 2014. Those tend to rise as income levels rise, unless a person reports that they made no money, which is a red flag.
For those who are contacted for audit, the process isn't as arduous as one may think.
"What you see in the movies is probably the IRS agent knocking on your door, but a lot of the times you just get a letter from the IRS," says Jean Pawlow, Co-Chair of the Tax Controversy Practice at McDermott Will & Emery LLP, in Washington, DC. "Just because you've gotten a letter from the IRS doesn't mean that you owe more money or that you owe more taxes. A lot of times the IRS just has a question."
Pawlow and Williamson point out several reasons as to why a taxpayer could get that letter from the IRS.
The first is failure to report all of your income. Employers and financial institutions send the IRS documents on what they've paid out and to whom. If a taxpayer's income tax filing does not match those records, the IRS will want to know why.
Another red flag that could trigger an audit are excessive deductions. The IRS keeps thorough records for comparison as taxpayers file for returns from year-to-year. A big jump in deductions could raise attention.
Budget cuts have also taken a toll on how the IRS is able to conduct the audits that do require more than a letter.
"We have seen a difference in our business," Pawlow says of her firm's experience. "We more often do the traveling instead of the IRS doing the traveling. We do things more often by phone calls now instead of in person meetings. Things sometimes take longer to resolve."
Experts say that good recordkeeping is the best way for taxpayers to be ready for tax season, as well as for any possible audits from the IRS.
Williamson says, "The time to do tax-planning and think about your tax return is not in March but in the 12 months preceding March, sometime in 2015. That's the only time one can really think about arranging their lives in a most tax efficient manner."
Williamson also points out, that if you do get a letter from the IRS, try not to take it personally.
The deadline for filing 2016 tax returns is Monday, April 18.